Navigating the tax scene can be confusing for small business owners. The last decade has seen a lot of changes in the health insurance and tax sectors. How can you know what is right for you and your business?
What Is an HRA?
An HRA is a Health Reimbursement Account or Health Reimbursement Arrangement. Indeed, the two terms are interchangeable. An HRA is an account funded by an employer that reimburses an employee’s out of pocket health expenses. It is a tax-free monthly allotment separate from health insurance. Further, the goal of the HRA is to allow employees to pay for health expenses without being taxed. Tax code section 105 is associated with these types of reimbursement arrangements.
What Are the Different HRAs Available?
There are three categories of HRAs.
Integrated HRAs are joined with a group health plan. However, stand-alone HRAs aren’t as straightforward. These plans may apply to retired employees that are funded through their previous employer. In 2017 the stand-alone HRA was all but replaced by the QSEHRA (Qualified Small Employer Health Reimbursement Arrangement). This HRA is much easier to implement across the country because it was made into federal law.
Which HRA Is Right for a Small Business?
In order for a small business to employ an efficient tax strategy, choosing to implement one of the following HRA options is wise.
Section 105 HRA
The first option is for an individual and is integrated with an existing health plan. The number 105 refers to the tax code under which provisions for the Self-Insured Medical Reimbursement Plan are mentioned.
A QSEHRA came about through the 21st Century Cures Act. This was signed into law in December of 2016. The Qualified Small Employer Health Reimbursement Arrangement applies to employers with fewer than 50 full-time employees. The employer also must not offer a group health plan. The QSEHRA requires healthcare services to be documented in order for them to be reimbursed.
How Does This Benefit the Small Business?
All QSEHRA reimbursements are free of any payroll tax.
Section 105 HRAs change what used to be a personal deduction into a business deduction.
QSEHRA contributions allow money spent on your employees’ medical expenses to be written off as business deductions.
For more information contact us. Our professional staff is qualified to answer your questions about how HRAs can benefit your small business.
Tax Tips for the Self-Employed
An Overview of the Net Operating Loss Tax Provisions in the CARES Act
How To Decrease Your Small Business Debt? A Step-By-Step Guide
Why Every Small Business Needs a Bookkeeper?
Tax Credits That Could Benefit Small Businesses
Why You Should, and Shouldn’t, Apply for a Tax Extension