Step 2: Creating Employee Compensation
Your employee(s) shall receive compensation for the duties performed that benefit your business. Compensation should be paid in a combination of cash (W-2 wages) and benefits (medical reimbursements) to ensure proper implementation of your HRA. Your SPD outlines the benefits you are offering each employee, established at the time you enrolled in the HRA.
Part A: Pay Employee a W-2 Wage
BASEŽ suggests that you pay your employee(s) on a salary basis (W-2) to help achieve uniformity. If you have any questions regarding this process, please contact a customer service representative at 1-800-370-9607.
Federal, state, and FICA (Social Security and Medicare) taxes should be appropriately withheld, and subsequently paid as required. Your tax professional or local IRS office can provide you with the necessary forms and assist you with completing them (click here for a list of forms).
BASEŽ has developed SamplePayŽ to help small business owners implement payroll for the first time. For more information about SamplePayŽ, call 1-800-370-9607 to speak with a BASE® Benefit Specialist or check out SamplePay® on the web.
Part B: Reimburse Medical Expenses - (C Corporations follow only part B)
All eligible medical expenses, as defined by your Summary Plan Description, must be reimbursed to your eligible employee(s) no later than December 31st of the current calendar year. (Note: fiscal filers reimburse no later than the end of your fiscal year.) It may be easiest to issue a monthly reimbursement check at the same time you issue a monthly payroll check.
Keep in mind, your employee(s) should pay for their family medical expenses from a personal or household checking account. At the end of each month, you simply write them a non-taxable, reimbursement check (from the business checking account) for the total of these expenses. For a complete listing of out-of-pocket expenses that are eligible for reimbursement, please see IRS Publication 502.
Part C: Create a Written Employment Agreement
An employer/employee agreement is a supporting document, which further solidifies the working relationship between you and your employee(s). This especially applies to situations where your employee is also your spouse.
The following information should be kept in mind as you create your agreement:
- The services provided by your employee(s) must be real, and specific work activities should be clearly understood and defined. In order to justify compensation, the services performed by your employee(s) must be significant to the success of the business.
- Compensation should be paid to each employee on a regularly scheduled basis (monthly) and must be in the form of W-2 wages and medical reimbursements. The total compensation package for each employee (combined wages and reimbursements) must be realistic and reasonable. For more information on compensation, please call customer service at 1-800-370-9607.
As an employer, you may be required to purchase Workers' Compensation Insurance. Contact your State Industrial Commission or Workers' Compensation Bureau to determine your state requirements. (Be sure to mention spousal employment.)