Tax Time: Going Beyond the Standard and Averages

When reading through BASE® information it is often stated that the average client saves over $4,500 in annual tax savings each year.  Clients are able to do this by establishing the BASE® HRA and going beyond the standard 1040 deduction.  What better way to provide more of an explanation of what “going beyond the standard” and “average” really means, then by sharing a real true story of someone who has utilized the HRA.

 

Enrolled since 2004, BASE® client Daniel S. out of Seattle, Washington continues to see the value of the BASE® HRA. “My wife and I are self-employed, selling real estate. After we were introduced to the BASE® HRA we saw that it was very practical and helpful for us to use.”

 

Daniel pointed out that, “The BASE® HRA has proved to be a great benefit to us. It allows us to deduct our medical costs from our income and save valuable tax dollars.”  And averaging over $5,000 in HRA tax savings over the years, Daniel and his wife are just one of thousands of business owners saving thousands in tax dollars each and every year with the BASE® HRA. 

 

The HRA allows business owners to go beyond the standard 1040 deduction, and allows them to claim health care expenses as a deduction on their business tax return.  This now makes health care expenses deductible from a federal, state and self-employment tax standpoint. Daniel relies on BASE® to walk him through any questions he has regarding his plan, and said “The BASE® staff is always very helpful when I call in and have questions. There was one instance where I needed to call in and receive help regarding a simple IRS form and I asked, “Am I doing this right?” The instructions that the BASE® Support Specialist gave me were very clear and very quick.” 

 

He continued to express the value of establishing this plan by saying, “If other eligible small business owners are not utilizing a BASE® HRA I would tell them that it is an extraordinary benefit and would ask them, “What would be the point of not looking into it? It has saved me and my wife a lot of money.”

 

While the savings we see average out to be over $4,500 in tax savings each year – that is a lot of money when it comes to small business and isn’t just your standard tax deduction!  Learn more today! 

Anne Case
BASE® - Director of Marketing & Communications

The Premium Tax Credit or the HRA deduction?

A recent study conducted by tax-preparer H&R Block found that 52% of those who enrolled in the Affordable Care Act coverage (Marketplace) are paying back part of their premium tax credits (subsidy). So which solution will save you more money, the BASE® HRA or the Premium Tax Credit?


The Section 105 BASE® HRA virtually guarantees that the premium can always be tax deductible for the business. Keep in mind that household income fluctuates each and every year. If the business or household has a higher earning year (yields increase, expenses go down, crop prices go up) the subsidy will be owed back on the personal taxes, thus they would lose the subsidy.


Here are some of the common questions when it comes to the BASE® HRA and Premium Tax Credit:


Q: Can Marketplace Premiums be reimbursed in an HRA?


A: Yes, for plan designs with only one qualified employee.


Q: Why does BASE® recommend not reimbursing premium where an employee obtains a subsidy?


A: The reimbursement of a Marketplace policy makes an employee ineligible for the Premium Tax Credit.


Q: Can I have a Marketplace policy, obtain the Premium Tax Credit and still use the BASE® HRA?


A: Yes. Your plan will be designed to reimburse Long Term Care premiums, Dental and Vision premiums, Supplemental Premiums and noninsured medical expenses. Health Insurance Premiums will not be able to be included.


We understand that each situation is different and circumstances change. If you have questions on how the BASE® HRA can help make health care affordable, call BASE® today at 1-888-386-9680. 


Tom Stiles
BASE® - Digital Marketing Assistant

S Corporations Save Thousands of Tax Dollars With HRA

S Corporations utilizing Section 105 HRA are saving thousands of additional tax dollars on medical spending


Many S Corporations today are only able to deduct 100% of their family’s health insurance premiums on the 1040, which includes federal and state tax savings.  However, some S Corps have found additional tax savings by establishing a Section 105 Health Reimbursement Arrangement. 

 

HRA savings are a result of FICA tax savings each pay period based on medical expenses incurred during that period, as well as additional FICA tax savings each quarter, since the corporation will not have to pay matching FICA tax for the medical expenses incurred.  However, shareholder-employees should continue taking the standard self-employment health insurance premium tax deduction on their 1040 (if applicable) while using the HRA.

 

The IRS requires you to have a formal written plan (HRA) in order to receive these savings. HRAs are considered non-discriminatory plans and therefore must also be offered to any qualified non-shareholder.  Because of the compliance issues surrounding HRAs, tax professionals rely on benefit administrators such as BASE® to handle these types of plans. 

 

How Does It Work?

The following example will take you step-by-step through an S Corporation scenario where the business has established a Section 105 HRA.  This particular S Corporation has the business salary set at $36,000, health insurance premiums are $500 per month, and out-of-pocket is roughly $250 per month.

 

Step 1

Shareholders must receive W-2 compensation (formal payroll) in order to achieve tax savings using an HRA.  The business starts by restructuring the $36,000 salary to include family health expenses.  The monthly salary will stay the same ($3,000), and is still subject to federal and state income tax.  The FICA tax is now calculated on $2,250 rather than $3,000 ($3,000-$500 HIP-$250 OOP=$2,250), increasing take home pay by $57.38 per month.

 

Step 2

The business must change the way they report income on the quarterly 941.  Previously, the business owner would have reported $9,000 as subject to Social Security and Medicare tax.  With an HRA in place it is now $6,750, reducing Social Security and Medicare tax.  This will result in the business not having to match Social Security/Medicare Taxes.

 

HRA savings are a result of FICA tax savings each pay period based on medical expenses incurred during that period, as well as additional FICA tax savings each quarter, since the corporation will not have to pay matching FICA tax for the medical expenses incurred.

 

Step 3

The business reports the total $36,000 W-2 income received by the shareholder on line 7 of the 1120S.

 

Step 4

The business must also adjust the W-2.  The HRA allows shareholder-employees to replace a portion of their existing W-2 income with an employee benefit that is not subject to Social Security/Medicare tax (FICA).  Box 1 remains the same as in previous years ($36,000).  Boxes 3 and 5, however, are reduced ($27,000).  The business will also report the $9,000 HRA employee benefit in Box 14, as other income, to verify to the IRS that the $9,000 is not subject to FICA/FUTA tax.

 

Many self-employed business owners, including S Corporation Shareholders, utilize an administrator like BASE® to go beyond the 1040 deduction with a Section 105 HRA.  Each scenario is different and deductions may vary based on your business size and plan design.  An HRA allows small business owners to save on their federal, state and self-employment taxes by taking the deduction on their business tax return. 

 

BASE® ensures that small business owners are properly deducting medical expenses with a formally written plan in order to stay in compliance with regulatory agencies such as the IRS, DOL and ERISA.  Currently the Departments are planning to publish future guidance on the application of the market reforms to a 2-percent shareholder-employee healthcare arrangement.  Until such guidance is issued, and in any event through the end of 2015, the excise tax under Code section 4980 will not be applied for any failure to satisfy the market reforms by a 2-percent shareholder employee healthcare arrangement.


Anne Case
BASE® - Director of Marketing & Communications