ealth Reimbursement Arrangements (HRA) Make a Comeback-Savior for Small Businesses
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.