Hsas Allow Insureds To Pay For Medical Expenses With Pre
Although being self-employed means that theres no employer footing the bill for health insurance, it also gives entrepreneurs a lot of flexibility in terms of what type of health insurance they purchase. One popular option is an HSA-qualified high deductible health plan .
Although some people have expressed concerns that market reforms under the ACA would be incompatible with HSAs, that has not proved to be the case, and HSA-qualified plans are still a popular choice in the individual market.
Coverage under an HDHP makes the insured eligible to open an HSA and make pre-tax contributions that can be used later to pay for medical expenses. In 2021, the contribution limit is $3,600 for people who have individual coverage under an HDHP, and $7,200 for those who have family coverage under an HDHP.
As is the case with the self-employed health insurance deduction, HSA contributions are deducted above the line on the 1040, which means the deduction is available to filers regardless of whether they itemize deductions. And there are no income limits in terms of who can contribute to an HSA anyone who has an HSA-qualified HDHP can contribute to an HSA with pre-tax money. You have until the tax filing deadline to make some or all of your HSA contributions.
How To Calculate Pre
Employer-sponsored plans are typically pre-tax deductions for employees. In most cases, deduct the employee-paid portion of the insurance premiums before withholding any taxes. However, pre-tax health insurance premiums may not come out before you withhold or contribute certain taxes. In some states, a pre-tax health premium is not pre-tax for certain taxes, such as state unemployment tax .
Lets say you purchase a Section 125 cafeteria plan for your employees. The premiums are $600, and you pay 50% of the premiums. So, you deduct $300 from your employees paychecks and contribute $300 to the premiums.
You have an employee who earns $2,000 biweekly. Here is what the 7.65% FICA tax looks like with gross pay of $2,000 and no deductions:
$2,000 X 7.65% = $153
But, a Section 125 plan is pre-tax. So before withholding any taxes, deduct $300 for the pre-tax health insurance.
$2,000 $300 = $1,700
After deducting the health insurance premiums, the employees pay is $1,700. Withhold the taxes for the employee based on $1,700 instead of $2,000. Take a look at the FICA tax now:
$1,7000 X 7.65% = $130.05
The employer portion of the FICA tax is lower, too, with pre-tax deductions. So, a pre-tax plan can also save you tax dollars by decreasing your tax liability.
The Coverage Offered By My Employer Doesnt Cover My Spouse What Can I Do
If you spouse still needs health insurance coverage, they can shop on the Marketplace for an Obamacare plan. And if they dont have insurance through their job or your job, they might be able to qualify for a subsidy. If your spouse has a subsidized Marketplace plan and you have insurance through your employer, that might be the most cost effective.
Even if your spouse is eligible for coverage through your employer, they still can elect to shop on the Marketplace. And even if they dont qualify for subsidies, they still might be able to find more affordable coverage for just themselves when compared to coverage through your employer-provided plan.
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The Better Option: Health Reimbursement Arrangements
Being on a group plan is like requiring everyone to wear the same size suit. Since everyone has their own needs and preferences when it comes to their health, doctors, and prescriptions, an HRA allows each employee to choose whats best for them.
A health reimbursement arrangement allows business owners to reimburse their employees on a tax-free basis for medical expenses, like health insurance premiums or qualified medical expenses.
Most importantly, HRAs allow business owners to avoid the penalties and fees and taxes we discussed earlier in the post.
The mechanics of an HRA are surprisingly simple. At a high-level, employees pay for their own health expenses and employers reimburse them. Heres how it works:
There are currently three “flavors” on the market.
QSEHRA:a Qualified Small Employer HRA allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want. The key thing to remember here is that all employees must be reimbursed at the same level.
How To Make This Happen
To capitalize on the promise of employee purchasing, employers and policymakers should pursue additional objectives. Employers should ensure that employees have reasonable plans available. The ACA requires insurers participating in ACA exchanges to offer plans with actuarial values of at least 70% and 80%, depending on employer size. Because our simulation finds that many would opt for a bronze-level plan , employees would benefit from access to such lower-cost plans. At the very least, employers should ensure that their employees may avail themselves of bronze plans in the regional ACA exchange.
Enabling employees to purchase health insurance requires arming them with the information necessary to make informed decisions, not a strength of the American health care system.
Congress can achieve meaningful transparency by requiring prior authorizations to enhance price and quality transparency. The ACA instructs exchanges to maintain transparency in coverage regarding all costs associated with qualified health plans and allocated funds to develop quality measurements to assess care quality. Employers, or coalition of employers, could use this funding to institute their offerings to educate and guide their employees, much as they supply mechanisms to inform their employees through retirement offerings.
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Do I Have A Formal Reimbursement Plan In Place
The first question to consider is, Do you have a formal reimbursement plan in place? A formal reimbursement plan is a type of group health plan. When you have a formal reimbursement plan, your organization has official plan documents outlining how the reimbursement plan works.
In many cases, reimbursements are tax-deductible to the organization and received tax-free by employees.
Common types of formal reimbursement plans include:
- Health reimbursement arrangements
- Employer payment plans
Q1 What Are The Consequences To The Employer If The Employer Does Not Establish A Health Insurance Plan For Its Own Employees But Reimburses Those Employees For Premiums They Pay For Health Insurance
Under IRS Notice 2013-54 PDF, such arrangements are described as employer payment plans. An employer payment plan, as the term is used in this notice, generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee under section 4980D of the Internal Revenue Code.
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How Is Affordability Determined
If applying for coverage through HealthCare.gov, employees will provide information about their individual coverage HRA offer when completing an application for Marketplace coverage, including the HRAs start date and their employer’s contribution amount. The Marketplace will determine if the offer meets requirements for affordability, which will help determine an employees eligibility for the premium tax credit. Prior to submitting a Marketplace application, employees can also use the HRA affordability tool for an estimate of their individual coverage HRAs affordability.
New Regulations Allow Employers Of Any Size To Reimburse Individual Market Premiums Starting In 2020
Prior to 2020, large employers were not allowed to reimburse employees’ individual market premiums. Employers with 50 or more full-time employees are required to offer group health insurance in order to avoid the ACA’s employer mandate penalty, and they faced even steeper penalties, as described above, if they reimbursed employees for individual market premiums.
But in October 2017, President Trump signed an executive order aimed at relaxing the rules on this issue. The executive order didn’t change any rules on its own it simply directed federal agencies to “consider proposing regulations” that would accomplish various goals.
One of those goals was to expand the use of health reimbursement arrangements and provide more flexibility in their use, including “allow HRAs to be used in conjunction with nongroup coverage.”
A year later, in October 2018, the Departments of Labor, Treasury, and Health & Human Services published proposed regulations to allow the use of HRAs in conjunction with individual market coverage, regardless of the size of the employer.
The regulations were finalized in June 2019, mostly as proposed but with some changes. The new rule took effect as of January 2020, allowing large employers to fulfill the ACA’s employer mandate by offering an individual coverage HRA used to reimburse employees for the cost of individual market health insurance.
Can I Offer An Individual Coverage Hra Along With Traditional Group Coverage
You can offer certain types of employees a traditional group health plan and other types of employees an individual coverage HRA. But you cant offer the same type of employees a choice between a traditional group health plan and an individual coverage HRA, and you cant combine an individual coverage HRA with a traditional group health plan or with SHOP coverage. For example, you can offer full-time employees a traditional group health plan and offer part-time employees an individual coverage HRA.
There are certain requirements if you offer an individual coverage HRA to one type of employee and traditional group health plan coverage to another type of employee. If you offer an individual coverage HRA only to certain employees, in some cases, there are size requirements for certain classes of employees that get an individual coverage HRA offer:
|Size of employer
10% of the total number of employees
If you don’t offer a traditional group health plan to any of your employees, these class size minimums dont apply.
St Century Cures Act Passed In 2016 Allows Reimbursement Starting In 2017
In December 2016, H.R.34, the 21st Century Cures Act, was signed into law by President Obama. The legislation is far-reaching, but one of the changes it made was to allow businesses with fewer than 50 employees to establish Qualified Small Employer Health Reimbursement Arrangements .
If a small business doesnt offer a group health insurance plan, a QSEHRA will let the business reimburse employees, tax-free, for some or all of the cost of purchasing individual market health insurance, on-exchange or off-exchange .
Using a QSEHRA, the maximum amount that an employer could reimburse in 2020 was $5,250 for a single employee’s coverage, and $10,600 for family coverage. These amounts are indexed by the IRS each year. For 2021, the maximum allowable QSERA reimbursement is $5,300 for a single employee and $10,700 for family coverage. The maximum reimbursement is also prorated by month, so an employee hired in the middle of the year would only be eligible for a prorated amount of the maximum annual reimbursement.
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Employer Payment Plans In Question
Employer Payment Plans, or EPPs, are being implemented as a solution to avoid costly and complicated group plans. In an EPP the employee is encouraged to select their desired individual plan and then submits the amount it costs them to their employer for reimbursement later.
Makes sense right? Not to big brother employer payment plans under ACA could expose you to expensive penalties depending on how you are distributing the reimbursement.
Small Groups: Employer Reimbursement Allowed As Of 2017
The Affordable Care Act only requires employers to offer health insurance benefitsto employees who work at least 30 hours per weekif they have 50 or more employees. But 96% of employers in the US have fewer than 50 employees and are thus not required to offer health benefits to their workers.
Many of them do, of course. According to a survey conducted by the Transamerica Center for Health Studies in August 2015, health insurance benefits were offered by 61% of businesses with fewer than 50 employees. But that might be a high estimate. A National Federation of Independent Business analysis indicated that only 29% of businesses with fewer than 50 employees were offering coverage in 2015. And Kaiser Family Foundation reports that about 31% of businesses with fewer than 50 employees were offering health benefits as of 2019.
Small group health insurance plans are available in every state, and innovative approaches to self-insurance have made this coverage option more realistic for small employers as well. But what about the people who work for all of the small businesses that don’t offer health insurance benefits? They have to use the individual health insurance market, where they can purchase coverage through the health insurance exchange, or outside the exchange .
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No Employer Payment Of Individual Health Insurance Premiums Allowed
The DOL, IRS, and HHS have previously released guidance limiting the employers ability to pay for individual health insurance premiums for employees, but prior guidance was somewhat unclear and left room for some alternative interpretations. As a result, a number of vendors have offered programs designed to allow employers to pay for their employees purchase of individual health insurance policies.
This new DOL guidance effectively puts an end to that practice. The DOL states that the payment of individual health insurance premiums by an employer constitutes a group health plan under federal law. A group health plan made up of individual health insurance policies violates a number of ACA related provisions. The first question in the FAQ states:
Q1: My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?
No. If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employers payment arrangement is part of a planmaintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee.
Is There A Health Insurance Deduction For The Self
If you buy your own health insurance, you should definitely know about the long-standing health insurance premium deduction for the self-employed.
Congress implemented a 25% deduction for self-employed health insurance premiums in 1987 and made it permanent in 1994. The self-employed received even better news in 2003 when premiums became 100 percent deductible.
The deduction which youll find on Line 16 of Schedule 1 allows self-employed people to reduce their adjusted gross income by the amount they pay in health insurance premiums during a given year. Youll find the deduction on your personal income tax form, and you can file for it if you were self-employed and showed a profit for the year.
If youre also eligible for a premium tax credit , you can only deduct the part of the premiums you pay yourself. That can get into some circular math, but there are two methods that the IRS will let you use to determine your deduction and your tax credit.
You cant take the self-employed premium deduction if you were eligible for group insurance from your spouses employer . That includes eligibility for reimbursements via a Qualified Small Employer Health Reimbursement Arrangement .
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How To Apply The Percentage Threshold
This 7.5% rule is typically disadvantageous mathematically, unless you have significant other medical expenses in addition to your insurance premiums. You can include these in the deduction to help you get over the 7.5% threshold.
As an example, you could not deduct your premiums in 2020 if your AGI was $60,000 and you paid $4,500 in health insurance premiums over the course of the tax year because 7.5% of your AGI works out to $4,500. You didnt pay anything in excess of that figure.
But youve spent a cumulative total of $7,500 if you additionally paid $3,000 in additional uninsured medical expenses. This is $3,000 more than your 7.5% threshold so you can claim the entire $3,000 as an itemized tax deduction.
Who Is Helped By The New Qsehra Reimbursement Rules
For employees who work for small businesses that don’t offer health insurance, the availability of premium subsidies in the exchanges depends on income, along with family size and the cost of coverage in the applicant’s area. In general, subsidies are available in most cases if the applicant’s household income doesn’t exceed 400% of the poverty level.
If you’re currently receiving a premium subsidy in the exchange and your employer begins reimbursing premiums under a QSEHRA, the exchange subsidy would be reduced by the amount of the employer reimbursement.
But if you’re not eligible for a premium subsidy in the exchange , a QSEHRA could directly benefit you if your employer decides to take advantage of that option.
This article outlines various situations in which a QSEHRA benefit can be helpful, harmful, or neutral to an employee’s financial situation.
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