HRAs
for the Self-Employed
An
HRA is simply an agreement which enables your business to cover employee's medical
expenses, including individual health insurance premiums, as a tax-free fringe
benefit. This tax benefit was established in Section 105 of the IRS tax
code in 1955, when General Electric lobbied for a business reimbursement rule
to give it more flexibility in creating employee benefits.
Anyone
set up as an S-corp or C-corp qualifies to set up an HRA. If you are a
Schedule C or Schedule F sole proprietor, an HRA
is allowed if your spouse can work at least part time in the business.
You will be setting up an employee benefits package that covers health insurance
premiums, disability insurance premiums, long-term care premiums, and even out-of-pocket
medical expenses such as dental coverage.
So
Simple, a 4 Year-Old Can Understand Them
"Do you want to spend
more money, or less money?"
A
couple weeks ago I took my family to Mexico for the week. Late one afternoon
I was sitting on the porch of our condo, sipping on a Herradura Reposado, and
sneaking in a little vacation work on my laptop. Wiley IV asked what I
was doing, and I told him I was writing a report about HRAs.
I
told him an HRA makes your taxes go down. That is because when you get
to write off medical expenses on your Schedule C, you avoid paying Federal income
taxes, state income taxes, and the 15.3% FICA self-employment tax. Not
only can the business reimburse you for the cost of health insurance premiums,
but you can also set up the HRA to reimburse for dental coverage, preventive
care, disability insurance, long-term care insurance, and other out-of-pocket
medical expenses.
If
you are self-employed but do not have an HRA, you can write off your health
insurance premiums on your 1040, saving you Federal income taxes, but you are
still subject to FICA and state income taxes for these expenses. You are
not able to write off any of the other expenses listed above.
Using
an HRA with an HSA
Some
financial advisors do not realize that you can have an HRA along with an HSA.
You can of course, the only caveat being that the HRA cannot reimburse for expenses
that could apply toward the deductible of the HSA, such as doctor visits or
prescription drugs. But, it can cover any insurance premiums and preventive
care.
The
potential savings are substantial. Let's assume Business Owner Bob is in a 28%
tax bracket, has an HSA
plan, and is incurring the following expenses.
Health
insurance premiums - $7,000
Preventive expenses - $1,000
Other insurance - $2,000
Since
he is self-employed, he can write off the $7,000 premium
on his Federal income taxes, saving 28% of that or $1,960.
If he fully funds his HSA, he will save an additional $1,582
off his Federal income taxes and $282.50 from his state
income taxes. So, in total, his taxes will go down
by $3,824.50.
Once
Bob sets up an HRA, the entire $10,000 in expenses listed
above can be reimbursed by the business. So he will
be saving $2800 from his Federal income taxes, $500 from
his state income taxes, and $1,530 in self-employment taxes.
He'll also get to take advantage of the same $1,960 in HSA tax savings, for a total tax reduction of $6,790.
Quit
Overpaying Your Taxes
Smart
business people take advantage of all the tax deductions
for which they qualify. Because an HRA is so easy
to set up and takes almost no administration, many HSA
for America members have already signed
up for one. You can reimburse health insurance expenses
from the beginning of the year, but out-of-pocket expenses
only from the date your HRA begins, so you should get this
set up now.
HSA
for America has made it easy and inexpensive
for our members to take advantage of this tax benefit.
For only $297, we will set up all legal plan documents,
and even have all your reimbursements reviewed at the end
of each year to ensure tax compliance. To sign up,
simply go to http://www.HSAforAmerica.com/HRA.htm.
For a more detailed description of HRAs, order our special
report, Section
105 HRA Plans For The Self-Employed.
We
are all about saving you money and helping you manage your
healthcare expenses in a more intelligent way, and we strive
to make it easy. If you have any questions about this,
let me know.
