Note added after first publication: The deadline for starting a HRA for retroactive tax treatment is March 30, 2017. HRAs can be started any time for expenses in the future.
The most significant tax change affecting small businesses in 2017 is the liberalization of certain types of Health Reimbursement Arrangements (HRA) under the American Cures Act enacted in December 2016. The new rules can save up to $2,000 in taxes for each employee in a small business that fully utilizes the new HRA rules.
Two types of HRAs
In 2017 we will see two types of small business HRAs. Both offer similar tax benefits. Firms may use one or the other, but not both. The determining factor is whether the employer has a group health insurance policy.
Uninsured expenses: The older type of HRA, for companies with a group health insurance plan,wraps around the group health insurance plan to help cover out-of-pocket expenses not paid by insurance.
Individual insurance: The new type of HRA is for companies without a group health insurance plan helps employees cover the cost of individual insurance on a tax-free basis.
The amount of benefits paid through the HRA bypasses wage taxes and worker’s compensation. This can add up to 40% of the total amount paid for the employer and employee. Than mean that if a HRA pays $5,000 benefits to an employee, the tax savings is $2,000.
The first requirements under federal tax law are that the HRA plan be presented in writing, meeting all tax requirements and communicated to employees. The benefit must be offered to all eligible employees on a consistent basis. The claim processing and employee reimbursement is usually integrated with the payroll processing service.
Cost of setup and administration
I am comfortable helping a small business set up either type of HRA and can usually do so in one day once we have planned the design and administration details.
For payroll clients: There is no charge for HRA setup for existing payroll clients but I charge some small amount for claim administration. The total cost works out to be about $100 per employee per year for firms with multiple employees when integrated with a payroll processing service.
For others: Small firms that request help with setting up a stand-alone HRA service can utilize the “Non-contracted services and initial engagements” at the minimum fee.
Checklist for setup
Plan setup requires the following information:
- Employer legal name and address
- Person to be plan administrator
- Employer EIN
- list of other qualified employee benefit plans
- Description of employee eligibility and exclusions
- Maximum benefit amount (single/family)
- Year-to-year carryover benefit (if any)
- Contact person for payroll administration
- Claim administration procedure
- Employee email list
After setup, HRA administration requires ongoing claims processing and coordination with the payroll system.