Health Reimbursement Arrangements (HRA) Make a Comeback-Savior for Small Businesses
August 22, 2017
Many small business owners have canceled their group health insurance reimbursements because the annual premium increases have priced them right out of the market. Some other small business owners would like to offer health insurance reimbursements, but are simply unable to do so. And there's another group of small business owners who have reimbursed their employees for their own individual health insurance in the past, but can no longer continue to do so under the Affordable Care Act.
All of this means that tax-free health insurance benefits have become a real problem for small employers. It's hard to compete against large companies if you do not offer a competitive health insurance package, but Kaiser Tax has great news! Health reimbursements, known as HRAs, are making a comeback. That's great news for small business owners in Minnesota.
How does a health reimbursement arrangement (HRA) work?
Effective January 1, 2017, a small employer can adopt a qualified small employer health reimbursement arrangement. A small employer is a company with fewer than 50 full-time employees during the previous year that does not offer group health insurance. That’s a fairly broad definition.
In a health reimbursement arrangement, a small employer can reimburse their employees for individual health insurance and out-of-pocket medical costs. The annual reimbursement maximums are $4,950 for individuals and $10,000 for families.
Health reimbursement arrangement (HRA) benefits for employers
Health reimbursements allow small employers to control costs through the maximum reimbursement amount. Employers can set up the reimbursement to have lower reimbursement amounts if they choose to.
For example, perhaps an employer sets up their reimbursement to have a maximum of $3,000 for an individual and $7,000 for a family. The employer can control the reimbursement amount they pay employees without worrying about annual premium increases as they would with a group health reimbursement.
Another benefit is that employers do not need to pick an insurance company or group reimbursement. No matter the reimbursement, somebody's going to be unhappy. A health reimbursement eliminates that factor. Plus, the health reimbursement is a tax-deductible expense to the business.
Health reimbursement arrangement (HRA) benefits for employees
Now, let's look at it from the employee side. The reimbursement for health insurance and out-of-pocket costs are all tax-free for employees. Everybody loves tax-free benefits. Additionally, they have freedom of choice, as they're not stuck with their employer's reimbursement. The employee picks the health insurance reimbursement that suits them best. It gives great flexibility.
As you might guess, there are some rules, complications, and requirements to this plan. You must have a reimbursement in writing and give employees written notice at least 90 days before the reimbursement starts. Employees must provide proof that they have minimum essential health insurance.
Special considerations for corporations and partnerships
We like health reimbursement arrangements and have used them several different ways with different entities. For sole proprietors, it works well if you have a family member who is a bona-fide employee. Two classic examples are family farms or husband-wife real estate teams.
C-corps also benefit greatly from health reimbursement arrangements. Shareholders can take full advantage of tax-free benefits. But S-corp shareholders and partners in partnerships have special rules that also include their family members. If you're an S-corp shareholder or partner in a partnership, the plan is still pretty good. Ultimately for the shareholder and the partner, you'll get tax-free benefits out of the reimbursement for health insurance. But the reimbursement for out-of-pocket expenses is a taxable fringe benefit for S-corps shareholders, partners and their family members. Compared to group health benefits, health reimbursement is still a pretty good option for these types of businesses.
If you're looking to offer health benefits to your employees, take a look at the health reimbursement arrangements (HRA)and give us a call at 952-646-9282. We can go through the requirements and set you up on the right path.
Can Rental Income Be Tax-Free?
August 1, 2017
Of course, our client was wondering about the tax consequences of doing so and if renting his condo was worth the effort after the IRS came calling. I was happy—delighted, actually—to inform my client that this rental income would be tax-free.
Our client was stunned. He asked his question again and wondered if we understood what he was asking. We did, and then went on to explain that under Internal Revenue Code 280(a), a taxpayer can rent out a dwelling for 14 days or fewer every tax year and not report it as income.
Yes, you read that correctly: under the Internal Revenue Code, if you rent a dwelling unit for 14 days or fewer during a calendar year, that income is completely tax-free. My client was absolutely astounded and delighted to hear that he wouldn’t have to pay tax on his Super Bowl rental income.
Tax-Free Rental Income for corporate shareholder
So, how does a corporate shareholder receive and use code section 280(a) to get tax-free rental income? Here are a few ideas for you.
Your corporation rents your house for a training, annual picnic, or holiday party and pays you—the homeowner—fair rental value. Consider a company retreat to your cabin up north or your condo in Florida. You have greater opportunities for tax free rental income if you own more than one residence. The great news is you can get up to 14 days of tax-free rent per residence. It even gets better as a residence includes some boats, mobile homes and any dwelling unit that has basic living accommodations, which includes a sleeping area, a toilet, and cooking facilities.
The company itself reports the rent as an ordinary, necessary business expense, which will reduce its corporate profit and save you some taxes. At the same time, you receive the rental income to you personally, and it is tax free. So, you'll be getting the best of both worlds. Your corporation gets a deduction, lowering your corporate profits and saving tax, while at the same time you receive rental income that is non-taxable under code section 280(a).
A couple of things to keep in mind here. We need to point out that the company use of your residence needs to be for meetings and not entertainment purposes. It's very important that you come up with and document a fair rental value. Make sure you as the homeowner invoice the corporation for the rent. In turn, the corporation should issue you a 1099-MISC for the rental income you receive. You need to handle the 1099-MISC properly on your individual income tax returns to make sure it's tax-free.
Tax-free rental income under Internal Revenue Code 280(a) is a great reimbursementning opportunity for corporations and their shareholders to get tax-free rental income. To take advantage of this great opportunity, contact Kaiser Tax today.
Use Your Business Entity to Create a Tax-Free Educational Assistance Program
July 13, 2017
We all know the cost of higher education is skyrocketing. We want to give you a tax strategy that willwork for your kids who are age 21 and older. They may be entering MBA programs, law school, or medical school. Or, perhaps your child is entering college later in life.
Did you know your business could pay up to $5,250 per year for educational assistance? It can, and it's simply wonderful. This education assistance is deductible to your business as a normal and necessary business expense. This means tax savings for you and at the same time, the assistance is a non-taxable fringe benefit to your employees, including your adult children who work for you. An educational assistance program pays for typical things such as tuition, fees, books, and supplies. It does not cover meals, lodging, and transportation.
Educational Assistance Program Questions
Kaiser Tax is often asked if educational assistance needs to relate to your business. That’s another wonderful part of this program: No, it does not. Let's say you own a retail store and your daughter is going to medical school. Under a qualified educational assistance program, your company can pay $5,250 per year for her medical schooling. The educational assistance program allows you to pay for classes that have nothing to do with your business.
Kaiser Tax also gets asked how many hours per year does a child need to work in your business to be eligible for this benefit. The good news is the Internal Revenue Code does not require your child to work a certain number of hours before they can become eligible. This means your child can work for you part time and still be eligible for this benefit.
Educational Assistance Program Requirements
This all might sound too good to be true. You hire your kids, you pay them to work for you, and you get to pay $5,250 tax-free for education. You must think there are some requirements or pitfalls, and you are correct. There are some.
At the company level, educational assistance is a qualified reimbursement. There must be a written reimbursement that spells out the benefit and who is eligible. The benefit must be offered to all “eligible” employees. You must consider the number of employees who might be eligible and what the potential costs may be to offer assistance to all of them.
If that cost is still favorable, there are several important requirements regarding your kids. Your child must be 21 years or older and a legitimate employee of your business. They cannot be more than a 5 percent owner of your business, and they cannot be your dependent for tax purposes. That's why these programs work best for children who are a little older and on their own.
If you can jump through these hoops, an educational assistance program is a great way to help your kids with higher education costs in the most tax-favored way possible. While this is a great strategy to help with the education costs for your kids, remember that everybody loves tax-free benefits. An educational assistance program is a wonderful recruitment and retention tool for other employees. To get help on your business’s educational assistance program, contact Kaiser Tax today.