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For many years, the IRS has allowed small businesses to adopt
Medical Expense Reimbursement Plans for their employees as authorized under
Internal Revenue Code Section 105. These plans allow for your business to pay for
things like insurance premiums, dental care, eye care, prescription drugs, and more,
on behalf of your employees. The costs are deductible to your business but are not
taxable income to the employee.
This is the same concept that big businesses use in Section 125 plans (cafeteria
plans) and Health Savings Accounts (HSAs). The small-business owner who currently
has no employees but does have a spouse that helps in the business achieves the
biggest benefit. The owner hires their spouse as a bona fide employee and adopts
a Health Reimbursement Arrangement that covers all of the employee’s family medical costs.
The employee’s family medical costs are your costs!
Example Of Potential Savings
If Joe Taxpayer, a small-business owner, normally has out-of-pocket medical
costs of about $400 per month, his tax savings could be $2,000 or higher. If he
spent $400 per month or $4,800 per year and was in the 28% tax bracket, Joe could
save 28% in federal taxes - or $1,344 - and 15.3% in self-employment taxes -
or $734 - for a total savings of $2,078.
Remember that Joe will save not only on federal taxes, but also on his self-employment
taxes and on state taxes (if Joe lives in a state that has state tax). The state
tax rate could generate savings of another 3% to 5%. Also, don't forget that the
$4,800 per year in medical expenses is money that is going to be spent anyway...with
or without a Medical Reimbursement Plan. Therefore, the $2,000 savings is totally
a result of the plan.
Reporting Requirements
A key benefit of the Health Reimbursement Arrangement is that neither the IRS nor
the Department of Labor has an annual filing requirement. Larger companies file
an annual form 5500 for their benefit plans, which can be complicated. Health Reimbursement Arrangements
have no such filing requirement. However, the IRS does require that the plan
be in writing and be nondiscriminatory.
How Do I Start A Health Reimbursement Arrangement?
The NASE offers free plan administration for a Health Reimbursement Arrangement!
You can access the help you need to set up your own plan at no additional cost to
your NASE Membership. Simply visit www.NASE.org, and log in to your MyNASE
account. Use the Quick Link "HRA" and fill out a no-obligation application today.
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