Providing Health Insurance Benefits - Part Three

HRAs offer tax-favored benefits. If you’re looking for a way to reduce employee benefit costs, you may wish to consider using a health reimbursement arrangement (HRA). An HRA is an employer-funded health benefit account for individual employees that may be used to pay their medical expenses and health insurance premiums. This type of plan is generally more economical and more flexible. Plus, it has more features than a traditional health benefit plan and, at the same time, provides favorable treatment for federal income tax purposes.

Under an HRA, the contributions you make and the amounts received by your employees are generally excluded from the employee’s income. In addition, any excess amounts at the end of the year can be carried over to future years without being lost.

In order to receive favorable tax treatment, an HRA must meet the following requirements:

•    The plan is paid for only by you and is not provided by an employee salary reduction election or under an employee benefit cafeteria plan;

•    The plan reimburses the covered person for medical care expenses of the person, the person’s spouse and the person’s dependents; and

•    The plan reimburses a covered person up to a maximum dollar amount for any period of coverage, and any unused portion of the maximum dollar amount at the end of that period is carried forward to increase the maximum reimbursement amount in subsequent coverage periods.

Self-Employed? To be considered for the plan, self-employed members must have one or less employee(s), be single entity owners of S or C-corps (with no unrelated, benefit eligible employees), or sole proprietors, single member LLCs, or partnerships.

In addition, the owner must have an employable interest (such as an employee), establish a compensation package, pay a W-2 wage monthly, reimburse medical expenses, and submit benefit expenses annually.

In order to make the self-employed HRA viable, the business owner would hire a family member (such as a spouse) and pay them a nominal monthly wage. The employed family member would pay all the family’s medical expenses from their personal account. Then, the business owner would reimburse 100% of the family’s medical expenses (including premiums and all medical expenses), along with a monthly W-2 wage, every month. At the end of each year, the employed family member would tally yearly expenses for taxes.

Providing Health Insurance Benefits - Part Two

A simple error may deny your deduction. As a business owner, you most likely provide health benefits for you and your employees. Even if you do not have employees, having a health insurance policy in your business may save you money.

As a self-employed taxpayer, you are allowed to deduct from your adjusted gross income, 100% of the cost of the health insurance policy. While this may not save in self-employment tax, the deduction will reduce your overall tax liability. You can title the policy in your name or in the name of your business.

If your business is a C corporation, the policy must be established by the business and in the business name. C corporations are allowed to deduct the cost of health insurance provided to the shareholders while remaining tax-free to the shareholder.

If your business is an S corporation, the policy must be established by the business, but not necessarily in the business name. A plan providing medical care coverage for the 2% shareholder in an S corporation is established by the S corporation if: (1) the S corporation makes the premium payments for the policy covering the shareholder (including a spouse or dependents, if applicable); or (2) the 2% shareholder makes the pre­mium payments and furnishes proof of payment to the S corporation, and then the S corporation reimburses the shareholder for the premium payments in the current taxable year. If the insurance premiums are not paid or reimbursed by the S corporation and included in the shareholder’s income, a plan providing medical care coverage for the shareholder is not established by the S corporation and the shareholder is not allowed the deduction. Provided these two conditions are met, and the payment for the premiums is included as wages to the shareholder, the shareholder is allowed a deduction on Form 1040, line 29, against income.

Providing Health Insurance Benefits - Part One

How does a self-insured plan differ from an insured plan? Most employers want to provide some type of fringe benefit to their employees. It’s a convenient way to attract and retain good workers. One of the more commonly provided fringe benefits is health insurance. There are three primary methods in which to provide this benefit.

As an employer, you can sign up for a group medical plan through an insurance company. The plan is simply an arrangement that provides payment to employees for illness or injury. The employer or the employee can pick up the entire cost of the policy, or the cost can be shared between them. In either event, the benefit is not taxable to the employee. If the employees are paying a portion of the premiums, the cost can be deducted from their paycheck before withholding is determined. Premiums that are paid entirely by the employer are not added to wages and the employer gets a deduction for the cost.

If you provide your employees health benefits under an insured plan, you are permitted to offer the benefit to some or all of your employees. By only offering the benefit to a certain class of employees, such as management, you can reduce your costs.

Another option is to provide benefits under a self-insured plan. Under this option, you do not carry a group medical plan but instead reimburse employees as they incur expenses on their own. Under this method, you are afforded a certain amount of flexibility in what you provide. You can pay your employees a flat amount or you can reimburse actual expenses. The downside to this type of arrangement is that you must offer the benefit to all your employees. You are not allowed to pick and choose which employees receive the benefit. Provided you do not discriminate, the benefit remains nontaxable to your employees.

The third option is a combination of an insured plan and a reimbursement plan. The same rules as previously mentioned apply to each component of this arrangement. If you offer both an insured plan and a reimbursement option, you can structure it so your employees have a choice between which options they want.

Children And Their Money

What you should know about kiddie tax. Is your child the next Warren Buffet? As a young boy at the age of 11, Warren Buffet invested the money he earned delivering newspapers into some farmland. He continued to invest and reinvest his money; now he is worth an estimated $85 billion. His parents didn’t have to worry about kiddie tax, but you might.

Special rules apply to the unearned income of certain children. Generally, your child is subject to kiddie tax if the following apply:

•    The child is under age 19 by the close of the tax year, or is a full-time student under age 24 with earned income less than half of his or her support;

•    The child’s unearned income exceeds a certain inflation-adjusted amount ($2,100 for 2018); and

•    The child isn’t married filing a joint return.

Unearned income for purposes of the kiddie tax rules is income other than amounts received as compensation for personal services actually rendered (wages, etc.) and distributions from qualified disability trusts.

Using Your Child's 529 Plan

Qualified tuition plans provide options. Many of you are already aware that contributing to a qualified tuition plan, commonly referred to as a 529 plan, can be a tax-free way to save for your child’s college education. But did you know that the Tax Cuts and Jobs Act added a provision that also allows you to use a 529 plan to pay for the enrollment costs for your child to attend an elementary or secondary public, private or religious school?

However, while distributions from a 529 plan for college expenses are unlimited provided they are used to pay for qualified educational expenses, distributions for elementary or secondary education expenses are limited to $10,000 per year per designated beneficiary. Also, some states, as in Illinois for instance, do not allow non-taxable distributions to be used for elementary or secondary education. If money is distributed for this purpose, it is taxed and potentially penalized.