Millions of Americans are unaware of the power of an HRA or “Health Reimbursement Arrangement”, in fact, many don’t even know that they exist.
Bottom line, if you have more than $5,000 a year in out of pocket medical expenses, i.e. co-pays, deductibles, prescription drugs, dental, eye care, chiropractic, etc…then chances are you could benefit from an HRA.
Most Americans don’t get a tax deduction for extra medical expenses. They can’t itemize (it’s usually not worth the effort with AGI limits), or they don’t qualify for a Health Savings Account (“HSA”). However, if you own a small business, the HRA could be the perfect fit. Just imagine if you could deduct 100% of these medical costs up to 10k – it could be life changing!!
Now, as I referenced above, many Americans try to take advantage of the HSA, but this is completely different…and keep in mind, not everybody qualifies for an HSA. You must have the right type of insurance. Yet, if you have a lot of medical expenses you probably aren’t using an HSA or have the right type of health plan either.
Hence…the HRA could be the perfect plan for you!!
What are the Rules?
- Health Reimbursement Arrangement can only be used by small-business owners. It is an employee benefit to ‘reimburse’ the medical costs of the employee, which could be you!
- If you’re single, you will need to utilize a C-Corporation to employ you with a W-2 and provide the HRA.
- If your married, you can probably implement an HRA simply through the use of a Sole-Proprietorship keeping the cost down.
- For those of you already utilizing an S-Corporation, you’ll need to use the C-Corp or Sole-Prop described above.
- You’ll need to implement an HRA plan document and procedure for reimbursement, which can actually be affordable, self-administered and simple to do.
Here are some diagrams that explain what your structure may look like:
What are some of the Benefits?
- No need to have a high deductible insurance plan like with an HSA, in fact, you don’t have to have insurance at all.
- It can be self-administered and is relatively inexpensive to implement ($400 or less)
- You can write-off all the medical expenses up to $10,000!!
- The same medical expenses apply for the HRA as those for itemizing and HSAs.
- The payments under the HRA to the employee are not subject to payroll withholding taxes.
- You can even deduct long-term care insurance premiums through an HRA that aren’t otherwise deductible for average Americans.
In summary, remember you must have a profitable small business to implement the HRA, you should have medical expenses of at least $4,000 (or more) a year to justify the additional administrative cost of the structure, and get some professional advice regarding your situation.
Run the numbers and make sure your advisor understands the documentation and reporting requirements. The HRA isn’t particularly expensive or difficult to implement, but this is something the average person shouldn’t try to figure out on their own. Get some technical support and guidance if you think the HRA is a potential strategy for you.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.