For many years, the IRS has allowed small businesses to adopt Health Reimbursement Arrangement plans for their employees. The plans allow for your business to pay for things like insurance premiums, dental care, eye care and prescription drugs. The logic is that even though most people have some insurance coverage they still pay out of pocket costs like their portion of premiums, deductibles, doctor visit payments, kid’s braces and co-pays on prescription drugs, among other costs. All of these items can be included in the plan as reimbursable expenses.

The employee tells the employer that they have paid some expenses, the company reimburses the costs, and the money is not taxable income to the employee but is a tax deduction to the company. The best situation is the small-business owner whose spouse helps in the business and is the only employee and designs the plan to cover the cost that they normally incur during the year. Now, because of this plan, all of the medical costs that the family has paid are now 100% deductible.

If you normally have out of pocket costs of about $360 per month, for example (health insurance premiums alone can be that high) your tax savings could be $2,000 or higher. So, if you spend $360 per month or $4,320 per year and are in the 28% tax bracket, you will save 28% in federal taxes or $1,210 and 15.3% in self-employment taxes or $661 for a total of $1,871. Remember that you save not only on federal taxes but also on your self-employment taxes and on state taxes, if your state has a state tax. Your state tax rate could save you another 3% to 5%. Also, don’t forget that this $4,320 is money that you are going to spend whether you have a plan or not, so the $2,000 savings is totally a result of the plan.

Another key point 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 Arrangement plans have no such filing requirement. The IRS does require that the plan be in writing and be nondiscriminatory.

An HRA plan of this type may cost $150 or more. But NASE Members receive the plan and administrative support at no extra cost to their membership. The NASE plan includes all plan documents, specific to your company with information you provide, a formal adoption agreement for you to execute, an employee eligibility form, a claim form for benefits, an annual report to participants, a complete employee packet ready to give to your employee, specific IRS code citations supporting your deductions and a complete implementation checklist to guide you step by step through the process. With the NASE HRA 105 plan, your medical expenses, including health insurance premiums that you pay out of your family budget, are now 100% tax deductible.