Stand-alone HRA For Tax Savings

Health Reimbursement Arrangements (HRA) are tax-free employer-funded plans provided by employers that reimburse employees for out-of-pocket qualified medical expenses, subject to a maximum fixed dollar amount for a specific period. Unused amounts may be rolled over and used in subsequent years. The employer funds and owns the arrangement.

KEY TAKEAWAYS:

Stand-alone HRA is an independent health reimbursement arrangement that is not tied to any other health plan. It can be offered by employers to provide employees with tax-free benefits to help cover the cost of medical expenses.
Stand-alone HRA for tax savings, employers must comply with certain rules and regulations which includes written notice to employees about the availability of the HRA and its terms, accurately recording all contributions and reimbursements made, and only reimbursing for eligible medical expenses.
Integrated HRA is a health reimbursement arrangement that is tied to a specific group health plan, and it is designed to complement the plan by reimbursing employees for eligible medical expenses, which may include premium payments for individual health insurance policies in some cases.
Stand-alone HRAs (Health Reimbursement Arrangement) offer several tax benefits for both employers and employees. Employers can deduct contributions as a business expense, and contributions made by employees are excluded from taxable income. Additionally, the funds in the HRA are not subject to payroll taxes, and employees can use the tax-free funds to pay for eligible medical expenses.

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What is a Stand-Alone HRA?

A stand-alone health reimbursement arrangement (HRA) is an HRA that is not tied to any other health plan, such as a high-deductible health plan or a group health insurance plan. It can be offered independently by an employer to provide employees with tax-free benefits to help cover the cost of medical expenses. There are limits on how much amount can be contributed for a stand-alone HRA. If you file a Schedule C, you can use stand-alone HRA to pay for qualified medical expenses using pretax dollars.

IMPORTANT: The contribution amount cannot exceed the net income from the self-employed business.

Certain stand-alone HRAs are exempt from the Section 4980 D excise tax, which is a penalty that can be imposed on the employer who fails to comply with the Affordable Care Act (ACA) rules relating to the plans. Specifically, an HRA is an arrangement (IRA NOTICE 2002-45) that -

The payment for this benefit comes entirely from the employer and is not taken from the employee's salary through a Section 125 cafeteria plan or any other means.
The benefit provides reimbursement for medical expenses considered qualified, including expenses for the employee, their spouse, dependents, and children under 27 years old at the end of the tax year.
The benefit has a maximum dollar amount that will be reimbursed for the coverage period.

Using A Stand-alone HRA

There are various rules and regulations that apply to stand-alone HRAs including eligibility, contributions, reimbursement, and nondiscrimination. Make sure you understand all the applicable rules and follow them.

To use a stand-alone HRA for tax savings, you would need to follow these steps:

To create an independent HRA program, it is necessary to develop a written plan and supporting documents. Written notice must be provided by the employer to employees about the availability of stand-alone HRA and its terms. Notice must be provided annually.
To add funds to your HRA account, you need to contribute. The amount you contribute must not be more than the maximum contribution limit allowed and should not be greater than your net income from your self-employed business. Accurately record all the contributions and reimbursement made through the HRA, and make sure that all required reporting and disclosure requirements are met.
HRA must only be contributed solely by the employer and not by salary reduction contributions. It can only be reimbursed for eligible medical expenses. reimbursements are not allowed for premium paid for individual health insurance policies.
A stand-alone HRA must be provided to all eligible employees regardless of their health status. You must report the HRA contributions on your Schedule C tax form. It will be deducted from your taxable income, which will reduce your tax liability.

Is There an HRA For a Group?

Integrated Health Reimbursement Arrangements (HRA) is also a health benefit plan like stand-alone, but it is designed to work in conjunction with a specific group health plan, typically a high-deductible health plan. It can be a valuable tool for employers who want to offer their employees a cost-effective health benefit.

Some features of integrated HRAs are:

Integrated HRA is designed to be used to reimburse employees for qualified medical expenses.
Like stand-alone, it can reimburse eligible medical expenses. In some cases, it can also reimburse for premium of individual health insurance policies.
It must follow a certain design requirement including minimum deductibles and maximum out-of-pocket limits. This is to make sure that the plan provides adequate coverage to employees.
Although the employer is the primary contributor, the employee can also contribute to the plan. The contributions are usually tax-deductible for the employers but are not for employees.

One of the main advantages of an integrated HRA is that it can be used to offset the higher deductibles and out-of-pocket costs associated with an HDHP. It can help employees pay for these costs while still enjoying the tax advantage. However, integrated HRAs can be more complex to administer, and must comply with specific design requirements to avoid running afoul of IRS (Internal Revenue Services) regulations.

A stand-alone HRA, on the other hand, is typically simpler to administer, and can be used to help employees pay for a wide range of qualified medical expenses. However, the employer cannot use the HRA to reimburse employees for insurance premiums and must comply with certain nondiscrimination rules to ensure that the plan is being offered fairly to all eligible employees.

HRA For Tax Savings

A stand-alone Health Reimbursement Arrangement (HRA) can provide tax benefits for both employers and employees. Here are some ways that a stand-alone HRA can help with tax savings:

For Employers:

Employer scan deduct the contributions they make to their employee’s stand-alone HRAs as a business expense on their tax returns.
Stand-alone HRAs are funded solely by the employer, the contributions made to the HRA are not subject to payroll taxes, such as Social Security and Medicare taxes.
In some cases, a stand-alone HRA can be used to reimburse employees for health insurance premiums, which can help offset the cost of providing health insurance coverage to employees.

For Employees:

Employees can use funds from their stand-alone HRAs to pay for qualified medical expenses tax-free.
Contributions to a stand-alone HRA are not included in an employee's taxable income, they can help reduce an employee's tax liability.

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Conclusion

It is important to note that stand-alone HRAs are subject to certain rules and regulations, including nondiscrimination rules, and often can be complex depending on a range of factors. Employers should consult with a professional expert’s counsel to ensure compliance with all applicable regulations.

Investor Friendly CPA® has professional experts who can provide you with free counseling to ensure that you meet all the rules and regulations and ensure you compliance with your tax.