Healthcare can be expensive when an individual or their family member is injured or gets sick. The co-payments, co-insurance, deductibles and prescriptions can add up quickly – often into the thousands.
Businesses can help their employees manage healthcare costs by adopting a Health Reimbursement Account plan. Under an HRA, the employer can provide tax-free reimbursements of an employee's out-of-pocket medical expenses. This type of program is especially beneficial to 1-employee S-Corporations, family-owned and operated businesses, and other businesses that want to help their employees.
There are several types of HRA plans which include:
- Section 105 HRA (HRA)
- Qualified Small Employer HRA (QSEHRA)
- Individual Coverage HRA (ICHRA)
- Group Coverage HRA (GCHRA)
There are certain eligiblity requirements, limitations, and compliance issues with each type of HRA plan and it is best to use a plan administrator to design and manage the plan.
The following sections provide general information for each type of HRA plan.
Section 105 Health Reimbursement Account (HRA)
A section 105 HRA plan is available to sole proprietors, partnerships, C-Corporations, and S-Corporations when there are fewer than 2 employees and certain other conditions are met. If the conditions are met, the business can reimburse an employee for their out-of-pocket healthcare expenses. The general requirements are:
| Business Entity |
Requirement |
| Sole Proprietor |
The owner is not an employee and is ineligible. However, if the owner is married and the spouse provides services to the business as an employee, the spouse can be covered by the HRA and receive reimbursements on behalf of the family. |
| Partner |
The partner is not an employee and is ineligible. However, if the partner is married and the spouse provides services to the business as an employee, the spouse can be covered by the HRA and receive reimbursements on behalf of the family. |
| C-Corporation Shareholder |
The shareholder is eligible and does not have to be married to receive reimbursements. |
| S-Corporation Shareholder |
The shareholder is eligible and does not have to be married to receive reimbursements. The shareholder must be a W-2 employee of the business. |
The following example presents the tax savings of a section 105 plan to a greater than 2% shareholder/employee of an S-Corporation. For the example, let's assume that the S-Corp owner had $10,000 of out-of-pocket medical expenses:
| Out-of-pocket medical expenses |
$10,000 |
| Social Security/Medicare |
15.3% |
| Tax Savings |
$1,530 |
The plan may be designed to reimburse a set amount or an unlimited amount.
Qualified Small Employer HSA (QSEHRA)
An employer with fewer than 50 employees that doesn't offer a group health insurance plan is eligible to establish a QSEHRA. Under the plan, the company can reimburse each employee up to $5,450 during 2022 ($11,550 for family). The QSEHRA must offer the same reimbursement amount to all employees.
Employees may use the QSEHRA to seek reimbursement for individual health insurance premiums and out-of-pocket medical expenses.
Individual Coverage HRA (ICHRA)
An ICHRA is available to all employers and offers greater flexibility than a QSEHRA. For example, the plan may be designed with higher reimbursement amounts. In addition, reimbursement amounts can be based upon classes of employees. Each class can be reimbursed a different amount.
Group Coverage HRA (GCHRA)
Employers that offer a group health plan can adopt a group coverage HRA plan and the employees with group coverage can participate. The GCHRA helps employees pay out-of-pocket medical expenses.
At Jeffrey L. Jackson CPA, we work with our small business and individual tax clients to help them navigate the complex health insurance rules. Our goal is to help reduce taxes by maximizing deductions in accordance with the tax code.
We offer a full range of accounting, tax, and payroll services geared for 1-person S-Corporations and other small businesses.
