HRA Self Employed Report

Write off your health insurance and medical expenses
as a Business Expense using an HRA

Imagine how much money you would save every year if your business could pay for your health insurance premiums, your life insurance premiums, your disability premiums, and your long-term care premiums.  What if it could also pay for your eye glasses, your dental expenses, your weight-loss classes, and your routine physicals and other preventive care? All as a business expense!

Well, it could save you up to 48% or more on the cost of these services.  If you’re in a 28% federal tax bracket, pay 5% state income taxes, and 15.3% self-employment tax, then the government’s certainly taking its share.

The bottom line – take advantage of every legal tax deduction for which you qualify.  Do not foolishly pay more taxes than you should.

What Is An HRA?

An HRA is simply an agreement which enables your business to reimburse employee’s medical expenses, including health insurance as a tax-free fringe benefit. It is similar to the way employers routinely reimburse employees for travel, meals, and other qualified business expenses.

This tax benefit was established in Section 105 of the IRS tax code in 1955, when General Electric lobbied for a business reimbursement rule to give it more flexibility in creating employee benefits.  It is a tax savings plan which gives you a full business expense deduction, meaning you get a deduction on Federal, State, and FICA taxes.  Best of all, an HRA plan is now extremely easy to set up, and a cinch to manage.

How An HRA Will Save You Money

Here is a simple example showing how an HRA can save you almost $6000.  Let’s assume that you are a self-employed ticket broker and you have the following expenses:

Health insurance premiums	$7,000
Braces	$3,000
Routine physicals and screening exams	$500
Dental visits	$400
Medical Expenses	$1,000
Lasik Surgery	$3,000
Rx	$1,000
Life Insurance Premiums	$500
Total Medical Costs	$16,400

As a self-employed individual, you can already write off 100% of the cost of your health insurance on your 1040.  If you are in a 28% tax bracket, this will save you $1960 in federal income taxes.

$16,400

- $1,960

= $14,440 Net cost

 

 

If you have a section 105 HRA set up, the entire $16,400 would be considered a business expense1.  Thus, you would avoid paying the 28% federal income tax, your state income tax (say 5%), and of course the self-employment tax of 15.3%.  So your tax savings would be 48.5% of $16,400, or $7954.

$16,400

-$7,954

= $8,446 Net cost

 

 

So in this example you are saving $5994 by reimbursing these expenses through your HRA.  That’s certainly enough to make the payment on that new Audi convertible you’ve been eyeing.  Or perhaps pay for a well-deserved week off in Hawaii.  Or maybe you just want to reinvest the savings back in the business and keep charging ahead…

You can calculate your own potential savings by using our HRA Savings Calculator.  And if you’d like to see another example of how this works, view our “Bob and Carol” HRA Tax Savings Case Study.

Who Should Set Up An HRA?

C-corps: If you have a C-corp with no other employees, an HRA is perfectly straightforward.

S-corps: An HRA can be used in a limited way to benefit an S Corp owner.  It won’t save taxes but it will allow that shareholder to increase the W2 wages and decrease the 1120S income by using an HRA to reimburse the out-of-pocket and premium expenses.  If you are set up as an S-corp and want to provide a benefit plan to your employees, an HRA is definitely the way to go.

Schedule C or F: If you are a sole proprietor and pay taxes on your self-employed business via a schedule C or F, you must have a spouse that you can employ at least part time in the business.  This will allow you to provide him or her with an employee benefits package, which also covers you as the dependent.

It is a common practice in many small businesses for the spouse to help in the business, often performing routine tasks such as bookkeeping, filing, and running basic errands.  Yet often they are not compensated for this work.

So for an HRA account to work for schedule C businesses, you would need to begin paying your spouse a reasonable wage.  You can set their pay at any level you want, but for someone working part time in a situation like that above, $250 a month, or $3000 a year, is considered reasonable.

Once your spouse is established as an employee, the HRA can reimburse them for health insurance premiums and other medical expenses as a tax-free benefit.  You, as the dependent of the employee, would of course fall under the same benefits.

You can read more detailed information about how HRAs work for various legal entities, including sole proprietors, partnerships, corporations, S corporations, and LLCs.

What Expenses Can An HRA Reimburse?

In order to maximize your tax benefits, you’ll want to pay as many eligible expenses through your HRA as possible.  When you establish your HRA, it will state exactly what kind of expenses can be paid from it.

These expenses can include…

• Health insurance premiums
• Dental coverage
• Vision coverage
• Rx benefits
• Medicare and long-term care premiums
• Disability premiums
• Life insurance premiums for up to $50,000 coverage on the spouse
• Preventative care benefits such as annual physicals, preventative screenings, weight loss programs, or smoking cessation programs
• Alternative care such as chiropractors and acupuncture
• Over-the-counter medication when prescribed by a physician
• Other out-of-pocket medical expenses

There are no limits on HRA contributions imposed by the Internal Revenue Code or under IRS guidance.  You may also vary the contribution each year.

How To Combine A Low-Cost HSA Plan With Your HRA

Most self-employed people today are setting up health savings accounts, or HSAs, as a way to lower their costs and save for the future.  An HSA is available to anyone with a qualifying high-deductible health plan.  If you have an HSA, you can deposit up to $5800 into a tax-deductible account, which can then be used to pay future medical expenses.  If the money is not used, it is yours to keep and just grows tax-deferred like an IRA.

HSA plans offer lower premiums, they save you money on taxes, and they are the very best tax-advantaged way to save for future medical expenses you may incur during retirement.  By combining an HRA with your HSA, you will be able to increase your tax benefits even further, and avoid withdrawing money from your HSA.  This will enable you to take full advantage of the tax-deferred growth that an HSA offers.

Though some advisors may tell you that you cannot have both an HSA and an HRA, this is not the case.  An HRA does not disqualify someone from having an HSA, if the expenses reimbursed by the HRA are limited to medical items allowed for first-dollar coverage on an HSA plan³.

So, with an HSA you can have an HRA that reimburses directly for expenses or for insurance covering:

• Accident coverage
• Hospital indemnity coverage that pays a set amount per day you are in the hospital
• Specific disease care that pays a set amount if you get cancer or some other specific disease
• Dental and vision care
• Wellness and preventive care, such as:
• Annual physicals and diagnostic screenings
• Routine prenatal and well-child care
• Child and adult immunizations
• Tobacco cessation programs
• Obesity weight-loss programs

Your HRA may not cover expenses that are meant to apply directly toward the deductible of your HSA-qualified plan, meaning it cannot reimburse for doctor visits, prescription drug coverage, or hospital charges prior to meeting your deductible.

How An HSA Along With Your HRA Will Save You Money

Assuming the same example as above, let’s look at how having an HSA along with your HRA will save you an additional $2,000, or nearly $8,000 over having neither.

Health insurance premiums	$5,000
Braces	$3,000
Routine physicals and screening exams	$500
Dental visits	$400
Out-of-pocket medical expenses*	$1,000
Lasik surgery	$3,000
Out- of-pocket Rx*	$1,000
Life Insurance premiums	$500
Total Medical Costs	$14,400

Because HSA-qualified plans are much less expensive than traditional co-pay plans, in this example the health insurance premium dropped from $7,000 to $5,000 per year.  Typically, the savings are even more.

You can then use your HRA to pay all of these medical expenses except for the prescription drugs and out-of-pocket medical expenses, which are expenses that would apply toward your deductible.  So that would amount to a $12,400 business expense, once again saving you 28.5% in federal income taxes, 5% state income taxes, and 15.3% self-employment taxes, for a total HRA tax savings of $6,014.

With an HSA a family can deposit up to $5,800 into their account, for which they get a full write-off on their federal income taxes, as well as their state income taxes in all but four states4.  Again assuming a 28.5% federal income tax and a 5% state income tax, 33.5% of $5,800 results in an additional tax reduction of $1,943.

$14,400
- $6,014	HRA Tax Savings
- $1,943	HSA Tax Savings
$6443.00	Net Cost

So the end result in this example is that having an HSA plan in conjunction with your HRA is saving you an additional $2,003 over having just an HRA, and an additional $7,957 over having neither.

Additionally you now have money growing tax-deferred in your HSA!

How Much Paperwork Is Involved?

Because HRAs are considered to be “welfare benefit plans” as defined under ERISA Section 3(1), there are certain record keeping requirements.  Our program makes the process is very simple, and ensures that you are in compliance with all federal regulations.

To establish an HRA, the IRS requires the following:

• A formalized working relationship with your spouse, including a written employment agreement, which outlines your spouse’s responsibility and wages.
• A plan document
• Summary plan description must be furnished to plan participants

When you apply for an HRA through HSA for America, the framework, documentation, and administration is provided, making offering the employee benefit plan to your spouse simple and easy to do.  All you have to do is fill out a simple questionnaire which takes about 5 minutes.  You will then receive a pdf copy of all documents and login information to 105 Concepts, where you can manage your account.

Each year you will then:

• Send your deductible expenses for review, assuring the expenses you are claiming are legitimate, deductible expenses.
• Review your program,, giving you the opportunity to adjust the expenses your HRA will cover, or to re-elect the same benefits. 
• If a change is made, a new Summary Plan Description is provided detailing new plan elections. 

How To Get Signed Up

An HRA can be set up with an HSA plan, or a traditional copay health insurance plan.  To sign up for an HSA-qualified health insurance plan, the first step is to run quotes on the instant quote system at www.HSAforAmerica.com.  You can then choose the plan that best meets your needs, and apply online.

You could have your attorney or CPA set up your HRA, but the costs would likely be $500 - $1,000 or more.  Because the system we use is a fully integrated web application which allows us to build a custom HRA plan with the click of a mouse, we can put together your HRA much more quickly, and much less expensively. 

Once you have your health insurance in place, you can quickly set up your HRA on our online HRA Signup.  The cost is only $297, and the process should take no more than 10 minutes.  We will then email you all relevant documents and login information so you can then manage your own account.

Footnotes

1. Insurance premiums can go back to beginning of year.  Other reimbursements start when HRA starts.
   
   
2. Under IRC Section 223, an eligible individual cannot be covered by a health plan that is not an HDHP unless that health plan provides permitted insurance, permitted coverage or preventive care.  A health FSA and an HRA are health plans and constitute other coverage under section 223(c)(1)(A)(ii).  Consequently, an individual who is covered by an HDHP and a health FSA or HRA that pays or reimburses section 213(d) medical expenses is generally not an eligible individual for the purpose of making contributions to an HSA.  See Rev.  Rul.  2004-38, 2004-15 I.R.B.  717, which holds that an individual who is covered by an HDHP that does not provide prescription drug coverage and a separate prescription drug plan or rider that provides benefits before the minimum annual deductible of the HDHP has been satisfied is not an eligible individual for HSA purposes.
   
   
3. See our HSA State Income Tax page for information on which states allow a deduction for HSA contributions