Section 105 HRA Tips - Key Elements to Successfully Utilize Section 105 HRA

April is here and known to all for the big tax deadline. At BASE® we find that this is the perfect time to remind you and your clients of some of the key elements to successfully utilize the Section 105 BASE® HRA, because all it takes is one misstep to put clients at risk for an audit – and lose.

Checking accounts established and handling of reimbursements:

  1. Establish payroll for employee to document compensation.
  2. Employee (spouse) pays for medical out of personal checking account.
  3. Employee submits qualifying medical expenses for reimbursement (preferably once per month).
  4. Employer (spouse) reimburses employee for expenses out of business account.

By following these steps, 105 plans will meet plan requirements, and more importantly, avoid bringing a 105 plan under fire in an audit. BASE® also helps provide all of the documentation and guide clients through these steps to ensure that plans are in compliance.

Let's take the case of Shellito vs. IRS. They were audited for taking this deduction because Mrs. Shellito was not seen as an employee because she was not compensated. Basically, the Shellito's failure to fully comply with the plan was a red flag to the IRS, and while the case was later reversed it could have been avoided altogether.

BASE® does its due diligence to make sure our clients understand all aspects of the plan and walk them through the process, including what steps to take to ensure the business is following the proper compensation and reimbursement procedures to avoid an audit such as this.

Remember, the Section 105 BASE® HRA has helped thousands of self-employed business owners across the country save an average of $4,700 each year in additional tax savings. By moving the deduction to a Schedule C, employers save self-employment taxes, gaining another benefit. Are your self-employed business owners, family farmers and ranchers aware of this tax savings benefit?

Introducing the BASE® QSE HRA

In December 2016, before President Trump took office, former President Obama signed the 21st Century Cures Act. While most of the bill covers health initiatives and focuses on finding cures and various health treatments, there are six pages that focus on small business owners and Health Reimbursement Arrangements. The bill introduced the Qualified Small Employer Health Reimbursement Arrangement or QSE HRA. As you might know, the Affordable Care Act enforced penalties for employers that utilized HRAs and employers that had these plans risked huge fines and penalties. However, these six pages have brought the HRA option back, increasing options for covering the cost of healthcare.

Market research shows 10 million stand-alone HRAs were dropped with the passage of the ACA, so BASE® is excited at the opportunity to bring this to the market. Our goal is to help make healthcare more affordable.  Thanks to this legislation, employers can help their employees pay for qualified medical coverage for themselves and their families, tax-free. The employees can use the money for insurance premiums, co-pays, deductibles, eye care, dental care, or any other qualified healthcare expense. The amount provided is tax-free to the employees and 100% tax deductible to the employer.

The QSE HRA allows employees to take control of their own insurance and pick the medical coverage that best suites them, while also saving employers money. It allows employers to provide up to $4,950 in medical reimbursement per-year for individual workers who show they have individual coverage and $10,000 per year for workers who show they have family coverage.

An employer is eligible to establish a QSE HRA if:

  • Employer has less than 50 Full Time Equivalents (FTEs)
  • Employer does not offer a Group Health Plan to its employees

According to Chatrane Birbal, the Society for Human Resource Management’s senior advisor for government relations: “For eligible small employers, this new law is welcomed and overturns guidance previously issued by the Internal Revenue Service and the Department of Labor that stated that HRA arrangements violated the ACA insurance market reforms, subjecting small employers to a penalty for providing such arrangements. This change provides small employers greater flexibility in terms of benefit offerings and allows eligible employers to use HRAs to help employees purchase an affordable health insurance plan that fits their individual budget and health care needs.”

Now that qualifying small employers no longer have to worry about penalties from the IRS or DOL, they can offer their employees a better option for rising health costs. Contact a BASE® representative to find how to lower healthcare costs with the QSE HRA.