Deducting Medical Expenses as a Business Owner
Many small business tax payers know that you can deduct medical insurance premiums as a business expense. However, most self employed people are “missing the boat” when it comes to other medical and dental expenses. They have heard that in order to deduct them here in the US, your expenses have to exceed a threshold of 10% of your adjusted gross income. This threshold is so high that few expenses get deducted.
How would you like to deduct your medical and dental expenses without a threshold and as a business expense. Well, you can if you do it smartly. Enter the Self Insured Medical Reimbursement plan; otherwise known as Health Reimbursement Arrangement (HRA)
What is an HRA? This is a reimbursement arrangement whereby your company reimburses you and family members for medical and dental expenses not covered by insurance. It is fully deductible as a business expense and tax free to the recipient.
Who can use it? There are two entities that can use it.
First, regular C corporation can set it up in their corporation minutes and reimburse employees and family members for expenses not covered by insurance.
Second, self employed people and sole owner LLCs can do this by first hiring their spouse and electing family coverage. This way the self employed person can deduct the reimbursements as a business fringe benefit expense and NOT as a medical expense. This avoids the 10% threshold and gives a deduction for the reimbursement. Even better the payments are tax free to the recipient.
S corps, multi owner LLCs, and partnerships can do this only for the owners and only for routine physicals and lab testing.
Can I just cover my wife and me and not give it to other employees? Yes and no, how’s that for being clear?
Generally an HRA is non discriminatory. This generally means that you cover 70% of employees eligible to participate.
HOWEVER, Congress allows you to discriminate as follows:
- You can provide routine physicals and lab testing and not have to give it to other rank and file employees.
- You don’t need to cover anyone under age 25
- You don’t need to cover anyone who works less than 25 hours per week.
- You don’t need to cover anyone who works less than 7 months per year.
- You can provide a 3- year waiting period before coverage can start.
What other things do I need to know?
Under the Affordable Care Act (ACA), You either must also provide health insurance from the exchange or qualified health insurance that meets all of the ACA requirements or the employee has to have a spouse who is getting it from their job in order to elect out of coverage. That is a new requirement of the ACA.
Secondly, the payment of salary and payments under the HRA have to be reasonable for what the employee does. Thus, if you have kids working for you for 5 hours a week, it will be hard to justify payments of $10,000 of braces plus a big salary. A reasonable salary is what you would pay and outside agency or person to do the same work. You would sum up the salary paid plus the payments under the self employed plan to determine if the total payments are reasonable for the hours worked and for what they do.
Thirdly, you should use a third party administrator to handle all this for you. They will set up the plan, provide a debit card for each employee and account for the payments. For more information, please go to hra.taxbot.com.
Fourthly, the benefits of an HRA are prospective only. You can’t take deductions for expenses incurred before the plan was set up; Thus, the soon you implement this, the better it will be for you.
The cost is about $40 a month , but the savings could be well into the thousands per year. This would certainly make your life much less taxing.
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