HRA plans have great value in Delaware - Part 3

A few other details about health reimbursement accounts:

1. Similar to pension plans, some options are available for limiting participation eligibility to after a certain period of employment, etc.
2. Reimbursements for the former year may be sought until the due date of the tax return, however, time must be allowed for the admin to prepare and mail the annual report before the tax return is filed. 
3. Former employees are not eligible for reimbursement of expenses incurred while an employee but not submitted for reimbursement until after employment ends.
4. An HRA is NOT the same as a HSA (health savings acct). A HRA is totally employer funded, nothing may be withheld from employee pay. A HSA only functions in conjunction with the presence of a high deductible health insurance plan. An employee does not have to have any health insurance to participate in a HRA.
5. The reimbursements are not taxable as compensation to the employee but are fully deductible by the employer as a fringe benefit as long as a qualified plan is established and annually renewed.
6. Unused allowances may carry forward for one year only and then they are forfeited.
7. Most states do not allow payment for major medical insurance premiums with an HRA although dental and vision premiums are normally ok. DE now allows reimbursements of health insurance premiums

HRA plans have great value in Delaware - Part 2

Health reimbursement accounts are great for certain self-employed persons in Delaware who meet the following criteria:

• No employees
• Have no insurance or significant out of pocket medical expenses in spite of insurance

A health reimbursement account can be set up to enable 100% above the line deductions of medical  costs which would otherwise be deducted oin schedule A to they extent they exceed 7.5% of AGI - if you can itemize. Depending on your federal and state tax rates, the break even point for covering the nominal annual admin fee may be as low as $1000 in costs.

Sole-proprietors/partnerships/LLCs will need to initiate employment of a non-owner spouse/s in order to take advantage of this program. Adding the hassles of payroll filings to the mix may negate the benefits of this plan unless medical and medical insurance expenses exceed $3000-$4000/year.

S-corp owner/operators are required to pay themselves wages so payroll will already exist in most cases. Reimbursements are deducted by the corp in the same manner as health insurance premiums - as wages not subject to FICA taxes. The above the line deduction on the 1040 washes out the income at the personal level.

HRA plans have great value in Delaware - Part 1

Health reimbursement accounts are an often overlooked fringe benefit option. Effective 2012, Delaware participants may use their HRA to pay medical insurance premiums as well as for out of pocket medical costs. These plans are especially helpfully for employers who wish to offer some type of medical benefits but can't risk being at the mercy of unknown, rising insurance costs.

Typically as an employer you would offer a lump sum of HRA monies - for example $2000 - per employee per year. Employees will submit a vague list of eligible expenses for reimbursement up to the annual limit. The employee is responsible for maintaining evidence of expenses and any repercussions for illegitimate reimbursements would be faced by the employee.
A 3rd party service such as BASE can be retained to assist with annual reporting requirements for a nominal annual fee.

Here is a link to generally allowable expenses:

http://www.4thdistricthealthfund.com/blog/hra-eligible-expenses

SE and S-Corp owner Medicare premium above the line deduction

The IRS has stated that Medicare premiums withheld from SS can be treated as self-employed health insurance for the purpose of obtaining an above the line (100%) deduction in some cases. This is more advantageous than deducting the premiums as a part of itemized deductions since A) you have to be able to benefit from itemizing and B) only medical expenses in excess of 7.5% of AGI (10% for years 2013 and beyond if not 65+ years old) may be deducted.

The taxpayer must get reimbursed by the business for premiums paid personally/directly. In the case of S-corp owners, the premiums must be included as wages for federal and state tax purposes in accordance with standard procedures for deducting owner health insurance premiums above the line. Constructive ownership rules apply. (Spouse and some other relations' premiums treated as your own.)

Impact of carry forwards on new 2013 taxes

Although IRS guidance is still in the making, it would appear from what we currently know that carried forward net operating losses from a business will not offset current year earned income for purposes of calculating the .9% earned income tax. Likewise, carried forward passive losses/capital losses will not offset current-year passive income or capital gains for the purpose of calculating the 3.8% net investment income tax.

Congress did not include in this bill any income averaging options. Even if you generally earn well below $200/$250 these additional taxes may take a bite out of you on the occasion of a once in a lifetime sale of property or real estate. Like kind exchanges (1031 transactions) and installment sales may come back into vogue. Taxpayers currently in the midst of reporting an installment sale may want to elect out of this treatment and pick up the remainder of the gain in 2012.

Additional 3.8% tax on 'net investment income' effective 2013

Part of the health care reform bill is a new 3.8% tax on the net investment income of taxpayers with AGI of $200k single/$250k MFJ. Net investment income includes interest, dividends, capital gains net of losses (not adjusted for investment expenses), net rental income, and net passive business income. This tax will be collected via the tax return but must be considered when determining withholdings and estimates as of 2014 to avoid penalties.

With higher capital gains rates already expected effective 2013 plus this tax, 2012 seems to be the best year to sell capital assets with a gain if at all possible. Some people may want to sell and repurchase the same assets just to recognize the gain at the lower rate. Losses will be more valuable to offset gains in future years.

It may be best to sell sooner rather than later as many could rush to sell assets later in the year bringing values down.

Additional .9% tax on earned income effective 2013

Part of the health care reform bill is a new .9% tax for households with AGI of $250k for MFJ/$200k for single. This tax will be withheld and remitted by employers in situations where an individual's wages exceed $250k in the year. In many cases, it will be the combination of income from a variety of sources which will push the income up to this level.

The .9% tax due but not withheld by an employer will be calculated on/added to tax due on the tax return. Some taxpayers will need to ask to have extra federal tax withheld or make quarterly estimated tax payments to avoid penalties and interest related to not paying in enough tax throughout the year. This new requirement will really hit home in 2014 after people have paid the .9% with their 2013 return. Each year taxpayers at this level must remit 110% of the total previous year tax to avoid penalties.

Taxes which are withheld but not due - perhaps due to business losses of a spouse - will be refunded with the return.