Fringe Benefit Plans and the PPACATax Savings for the Small Business Owner

Agenda• Why using the right plan is important• Rising cost of healthcare• One employee - IRS Section 105 & HRAs• Where and How do HRAs work?• Multiple employee / individual health plans• Simple FSA• Summary of Benefit Plans usage• Examples• Questions

Rising cost of healthcare

• According to The Kaiser Family Foundation’s Employer Health Benefits Annual Survey published in 2013, and titled, “Cost of Health Insurance,” the average annual premium for family coverage in 2012 is $15,745

• There has been an increase in average family premiums of 134% since 1999

Rising cost of healthcare

• One in five families reported they experienced serious financial problems due to family medical bills in the past 12 month period.

• 27% put off or postponed getting needed medical care.

• 34% reported skipping dental care or checkups.

Rising cost of healthcare

• 2.3 trillion* in 2008• $4.6 trillion* by 2019 • Every year more and more Americans lose their

health insurance for one simple reason: they can’t afford it.

*Source: Centers for Medicare & Medicaid Services“National Health Expenditure Projections 2009-2019” – November 1st, 2010

HRAs are alive and well!

• Are employer-sponsored HRA Plans still legitimate?

What is a HRA?• Converts normal insurance and out-of-pocket

expenses into an employee benefit program and becomes 100% deductible!

• What is a Section 105 HRA?• Section 105 is a 1954 tax law that allows for family

employment

Who Qualifies for a HRA?

• Business with 1 “benefits-eligible” employee– Benefits eligible - employees may be excluded if they are:

• Part-time: working less than 25 hours per week• Seasonal – working fewer than 7 months per year• Are less than 25 years old• Have been employed for less than 36 months with the business

• Basic HRAs cannot be used with more than 1 benefit-eligible employee unless integrated with a group insurance plan

What Business Entities Qualify?• Sole Proprietor• Partnership• C-Corporation• Non-Profit• Limited Liability Company• S-Corporation

How do HRAs work?

15.0 % Federal tax rate

5.2 % State tax rate

15.3 % Self-employment tax

35 % Total tax rate

2014 Comparison

With HRA

Premium Deduction 100%$9,299 x 100% = $9,299

Federal, State & SE Tax Rate$9,299 x 35.3% = $3,255Tax Savings = $3,255

Non-Insured Expenses 100%$5,362 x 100% = $5,362Federal, State & SE Tax 35.3%Tax Savings $1,877

Total Expenses $14,661Total Deduction $14,661

Total Tax Savings$5,132

Without HRA

Premium Deduction 100%$9,299 x 100% = $9,299

Federal Tax Rate $9,299 x 15% = $1,395Tax Savings = $1,395

Non-Insured Expenses 0%$5,362 x 0% = $ 0

Federal & State TaxTax Savings = $ 0

Total Expenses = $14,661Total Deduction = $9,299

Total Tax Savings $1,395

Employers without Group Insurance can still offer pre-tax benefits

IRS Notice 2013-14

• A company with more than one eligible employee will

no longer receive a tax advantage through a HRA

unless it sponsors group insurance

There Are Solutions

• No Limit Plan • Non-Employer Sponsored Premium (NESP)• Non-Excepted Health FSA Plan (NEFSA)

No Limit Plan

• 2+ employees / all are family members.• The No Limit Plan is a self-funded health Plan that

meets all Healthcare Market Reform requirements. • There is no limit to the amount of insurance premiums

or out-of-pocket medical expenses that can be reimbursed to your family-member employees.

• The following are reimbursable expenses under the No Limit Plan: – Insurance premiums– All out-of-pocket medical expenses

No Limit Plan

• Disclaimer: No Limit Plan increases risk to the business– Please be aware that the No Limit Plan could expose your

business to an additional risk: having a high amount of medical claims written off through your business.

– If you have employees who are not family members, this type of benefit Plan is not recommended.

Non-Employer Sponsored Premium• 2+ employees with individual health plans• Section 125 Plan - Employers May Continue to

Reimburse Employees for Individual Premiums

Non-Employer Sponsored Premium• The Non-Employer Sponsored Premium Account

(NESP) is designed for employers and employees to

contribute tax-free dollars toward individual health

insurance.

Non-Excepted Health FSA Plan

• Both employers and employees may contribute tax-

free dollars to help employees pay for eligible out-of-

pocket medical expenses

Flexible Spending Accounts• Section 125 Cafeteria Plan• Pre-Tax Dollars• Flexible Spending Accounts

• Medical• Dependent Care• Transportation• Insurance Premiums

• Save between 25% and 40%• Reduced Payroll Taxes

Who qualifies?

• Greater than 2% Shareholders of S-Corporations are excluded.

• Highly compensated employees are excluded.

SIMPLE Cafeteria Plans

• Provides new opportunities for some owners and highly compensated employees to participate where they could not in the past.

• A FSA Plan with no discrimination testing, but with a required employer contribution.

• For groups under 100 employees.

SIMPLE Cafeteria Plans

• Employer contributions to a SIMPLE Cafeteria Plan must be sufficient to provide benefits to non-highly compensated employees.

• Employers must choose one of the following contribution methods: – Uniform Contribution: A uniform percentage (at least 2%) of

compensation, whether the employee does or does not make salary reduction contributions to the plan; or

– Matching Contribution: The lesser of 2x the employee’s annual contribution, or 6% of the employee’s annual compensation.

Summary of Benefit Plans

Family Only

One Employee HRA Example• Bob and Nancy Johnson have three young children,

own a farm, and have two part-time employees. • Each year they have:

– $10,000 in insurance premiums – $5,000 in out-of-pocket medical expenses

• No additional benefit-eligible employees• They are able to write off all of their family’s medical

expense as a business tax deduction on their Schedule F tax form

• Total savings $5,250 on federal, state and self-employment taxes for the year.

No Limit Plan Example• Jim and Tracy Ledger are Sole Proprietors and own a

farm.– Their Parents work on the farm full-time and year-round.– Jim and Tracey do not sponsor Group health insurance

• The enrolled in a No Limit Plan as they cannot offer a traditional HRA due to more than 1 benefit-eligible employee

• With the No Limit Plan, the ledgers save federal, state and self-employment taxes on all premiums and out-of-pocket medical expenses

NESP/NEFSA Plan Example• Cucos Restaurant has 12 employees

– Do not sponsor Group insurance due to the cost– The owners want to offer benefits to help attract new and

retain existing employees

• Cucos implemented a NESP/NEFSA Plan• Cucos’ employees were able to reduce their taxes by

an average of 30%• The Plan was cost-neutral to the business because of

reduced payroll taxes (including Social Security and Medicare)

Multi-Employee Plan With Group Insurance• Y&K Ranch has had an HRA for years• When IRS Notice 2013-54 was implemented it had no

impact on the ranch because they offered Group insurance

• Their Plan is considered an integrated HRA and is compliant with the new regulations

Questions

• Paul Cannon– TASC Regional Director– Total Administrative Services Corporation– 800-422-4661 Ext. 2654