fringe benefit plans and the ppaca tax savings for the small business owner
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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
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