Health Insurance deduction for Single employee S-Corp

Linda,

Yes I am a >2% shareholder/employee of my S Corp and the only employee. Since I am a consultant presently working though my Corp the HRA could definitely pay for the medical expenses. I am looking down the road and possibly could have to take a position with a 'job shop' doing contract work for them and they offer no health insurance. First off, the corporation would have no income since paychecks would made out to me with all taxes deducted. Second, would the 'job shop' acknowledge my FSA allowing me to fund it with pre-tax deductable dollars?

Thanks again,

Ron

Assuming that the S Corp has an HRA established and now wants to allow pre-tax deductible employee contributions to fund an FSA, flexible spending account. What 'special ordering rules' would be placed on HRA reimbursements vs. FSA funds paying for qualified medical expenses? Some detail would help in understanding this.

Thanks again for your help!

Ron

Linda,

Thanks again for distilling down to the bottom line.

Have yourself a very Merry Christmas and a Happy New Year.

Ron

Linda,
I have recently been told by an insurance agent that a Texas corporation is not allowed to establish an HRA. I also read an article that basically stated the same thing and this article was posted on Core Documents site. Is this true?

Thanks again for your help!

Ron

Linda,

Your last statement now makes more sense to me!
"I think the HRA provides a better benefit than the HSA. Remember if you already have a high-deductible plan, you can still use HRA to pay the deductible and other expenses."

Assume that an S-Corp 2% shareholder/employee has purchased an individual high deductible medical insurance policy which is HSA compatible. If the employee does not set up an HSA but instead the S-Corp sets up an HRA, the HRA can reimburse 100% of the expenses incurred by the employee before the deductible is met, such as prescription drugs, insurance premiums and the cost of office visits. If an HSA had been set up then all of the above expenses incurred must be applied to the deductible before the HRA would be able to reimburse the expenses. By not creating an HSA this would avoid the problem of the 'special ordering rules', HSA first, HRA second.

Is this a correct statement?

Thanks again,

Ron

Linda,

Thanks again for further explanation.

Can you lead me to a list of 'other expenses' that the HRA would be able to reimburse a 2% shareholder/employee?

Thanks again,

Ron

Linda,

Thanks soooo much for the explaination on contributions to a 401K.

Do you have any advice on the S-Corp contributing to a >2% sharehold/employee's HSA.

Thanks

Ron

Linda,

I read your comments concerning a S-Corp reimbursing a >2% shareholder/employee for insurance premiums via a HRA. All of that makes sense except the statement about it being an advantage of having a 401K and "the HRA payments are also used in calculating the maximum contribution". Can you explain this comment. Does this mean that the maximum contributions made by the shareholder/employee to the 401K will be reduced by the amount of the S-Corp's contributions?

I am a >2% shareholder/employee of a S-Corp and will be applying for a HRA shortly to pay for my individual health insurance premiums written in the shareholder/employee's name.

What I need is a clarification and if possible IRS rulings that allow me to define how much and to what extent are the tax ramifications effecting both the S-Corp and the >2% shareholder/employee in contributing/funding a HSA.

Thanks sooooooo much!

Well, the IRS would say no when it issued Headliner 163, Health Insurance Covering S Corporation Shareholders back in May 2006. This says that in order to deduct the insurance premium there must be a plan in the company's name. Altering the your offer letter to cover the premium really doesn't help.

However, there is something called a Health Reimbursement Arrangement (HRA) or Section 105 Plan that allows the company to reimburse you for your health insurance premiums and other out of pocket medical expenses.

In order for this to work you need to have a written plan. It has to have some very specific language so you just can't add a motion in your corporate minutes & think you have it covered. There are several companies that provide the written plans and administration including Core Documents".

The way these work is you pay the premium & other expenses out of personal funds. Then you submit a reimbursement request with supporting documentation to the company. The company cuts you a check for the reimbursement and includes that in your W-2 wages. But these wages are not subject to FUTA, FICA or Medicare taxes (or state unemployment).

OK. So far this doesn't sound like a win, but bear with me. :)

At the end of the year your W-2 wages include the health reimbursements and are reported on Line 7 of your 1040. Now when you get to line 29, Self-employed health insurance deduction, you get to deduct the health reimbursements from your total income to calculate your AGI. The net result is you don't pay any income or employment taxes on the reimbursements and the company deducts the reimbursements as salary expense.

This is a great way to get money out of your S-Corp without paying taxes on it. The other advantage is the HRA payments count as wages when the IRS is looking at reasonable income. And if you have a 401(k) or SEP-IRA plan, the HRA payments are also used in calculating the maximum contribution.

And, the HRA payments can include other out of pocket expense besides just the premiums. So if you have co-pays, deductibles, over-the-counter meds, dental expenses, contact lens solutions, etc. these all can be reimbursed in the HRA plan. And you can also be reimbursed for mileage to & from your medical appointments at 17cents /mile (19cents for 2008).

I believe you can set a retroactive start date so you could be still reimbursed for expenses from earlier in the year.

The plans are really affordable. You should definitely look into them. I think this is one the best ways S-Corp owners to save on their taxes but aren't taking advantage of it.

Hope this helps!
L:)