Navigating the waters of the various healthcare strategies and reimbursement plans can be confusing. What is the right healthcare strategy and plan for you, personally? What is the right strategy and plan for you as a business owner?
During this presentation, Tom Gibson, CPA, and Kami Elhert discuss the rules and benefits of the different reimbursement plans available, including:
Transcript (edited for clarity)
Kami Elhert: Hello and welcome to Tax-Advantaged Healthcare Strategies. I am Kami Elhert, Senior Client Relationship Manager, and I am joined today by Tom Gibson, Tax Saving Professionals’ Senior Tax Strategist. Thank you for joining us today. Tom will be talking about tax-advantaged healthcare solutions, and we will review the rules and benefits of the different reimbursement plans available. Those include FSAs, flex spending accounts; HSAs, health savings accounts; as well as QSEHRAs, which stands for qualified small employer health reimbursement arrangements. Tom, can you speak about FSAs and their benefits?
Tom Gibson: To set things up at the outset, health insurance is one of the largest expenses. That certainly would be the case for a lot of our clients and, if you are a business owner, for your employees as well. Individuals can deduct healthcare expenses. The problem is, though, first you must be able to itemize your deductions, which, with the increases that came through under the Tax Cut and Jobs Act to the standard deduction, far less people are actually itemizing now. The second obstacle is the fact that health insurance expenses are subject to a 2% floor based on your adjusted gross income. Let’s say we have a person who’s making $400,000. He would add up all his health insurance premiums, physician bills, dentist bills, prescriptions, all the medical-related expenses. Those would have to exceed, in this example, 7.5% of $400,000, which would be $30,000. Well, that is a lot of money to spend. So, are there solutions for folks who have $5,000, $6,000 a year in healthcare expenses, but do not have enough to itemize? There are.
The flexible spending account, the first one that we are going to talk about, is offered through employers. A lot of you use payroll services to do your payroll tax prep. You are using Paychecks, ADP, and many of you already have what is called a Section 125 or a cafeteria plan in place. The cafeteria plan allows employees to pay for certain expenses, health insurance being the most common, with pre-tax dollars. It is a benefit to the employees. They are paying less money in federal income tax and, in many cases, less money in FICA and Medicare because they’re paying for the health insurance premiums pre-tax. But you can also have a flexible spending account. One component of the flexible spending account that is outside of the health insurance discussion saw a major change by Congress recently. You can have a flexible spending account for dependent care costs. For a single individual, you can set aside $5,250 pre-taxed and couples that are married filing joint can set aside up to $10,500 per year. You can use that money to pay for after school care, daycare, summer camps, any type of childcare related expenses. That is a nice benefit and that’s a big change.
Another component of the flexible spending account, apart from the dependent care, is a flexible spending account for health expenses. Now, with an FSA you cannot pay for your health insurance premiums. But what you can pay for are deductibles, co-pays, prescriptions, contact lenses, a lot of those out-of-pocket medical expenses that normally are not covered completely by insurance. When I go to my doctor, there is a $40 co-pay. We have a flexible spending account here at TSP. I whip out my orange debit card, pay for my office visit, and it comes out of my flexible spending account. The maximum benefit for this year, single or family, is $2,750. Now, there is a little wrinkle here, though. If you and your spouse work for different employers, you can both have a $2,750 flexible spending account, and you can use either of those accounts to pay your healthcare expenses. And that is a great strategy. I have four children. They are older. Braces at one point was a big deal. If you have kids in contact lenses and you are wearing contacts, again, those costs mount over the year, and if you can pay them with pre-tax dollars. That is much better than paying with after-tax dollars.
Now, one thing about the flexible spending account, and this is something that you must watch: you can put aside $2,750 per year, but what happens if you don’t use all that money by the end of the year? You lose it. Flexible spending accounts have a use it or lose it provision. As a result, I have been known to buy two years’ worth of contact lenses in December, just to make sure I used up the funds in my flexible spending account.
A lot of our clients are business owners, and business owners and their spouses cannot participate in a flexible spending account. If you own your S-corporation, own more than 2% of it, unfortunately, this is something that you cannot do.
What could possibly be available to you, though, is another arrangement called a health savings account. A health savings account, first, is different from flexible spending account in the sense that it is not a deduction that you would take in your business. It is a deduction that is taken as an adjustment to income on page 1 of your Form 1040. You fund this with after-tax dollars, but you get to deduct that amount off your taxes. So, apart from the payroll taxes, it leaves you in a very similar place in terms of your income tax bill. For 2021, for health savings accounts, the limits are $3,600 for individuals or single individuals and if you are married filing separately $7,200. If you are over the age of 55, you can contribute an additional $1,000 per year. It is called a catch-up contribution.
Again, you may ask the question, “What happens at the end of the year if I still have money left in my health savings account? Does that go away like the money in my flexible spending account?” And the answer is no. The flexible spending account belongs to the employer. If you leave the company or if you do not use the money, the money goes back to the employer. With the health savings account, you own the HSA, and the HSA goes with you.
We have some clients who contribute to an HSA account on their employees’ behalf, and employers can certainly do that. Employees then can, if they would like, also contribute to the HSA. But again, we cannot go over those limits we mentioned.
Eligibility for an HSA is a little bit tougher than eligibility for a flexible spending account. You do have to be covered by some type of insurance to have a flexible spending account. In our house, my wife, who is a teacher, and I are on her health insurance, but I am carrying the vision and the dental coverage. Because of that, I can have a flexible spending account and she has one too. You must have health insurance coverage to be able to participate in an HSA, and it must be a specific type of plan: it is called a high deductible health plan. A high deductible health plan means that it has a deductible of at least $1,400 for individuals and $2,800 for families, hence the name high deductible health plan. For 2021, for an HSA qualified insurance plan, your total out of pocket cannot be more than $7,000 if you are single or filing as an individual. If you are married filing joint, it cannot be more than $14,000.
Out-of-pocket expenses can include your deductibles, your co-pays, things like that. But it does not include the actual premiums for the coverage. And so, again, you must have a specific type of health plan to be able to do participate. But again, if your family is generally young and healthy, this might be a very valid option for you.
Now, with the HSA, as I mentioned, it is not a use it or lose it. It is your money. If you have a couple of thousand dollars left in your HSA at the end of the year, that is no big deal. It is simply going to roll forward to the following year. And again, you are going to be able to make the maximum contribution. It is a great way to build up some money inside of that HSA account. Healthcare costs do not go away when you retire. They are still going to be there at least as long as you’re breathing. And so even on into retirement, if you built some funds up in your HSA, they should be available to pay for whatever version of Medicare supplement you have.
Also, you can invest the funds in an HSA. Flexible spending accounts are just an in and out proposition. With an HSA you can roll it over and a lot of brokerage houses offer HSAs. You probably would not want to buy Bitcoin with your HSA, but it can draw a little bit of interest and invest it.
The HSA and FSA have been around for a while. A more recent plan that came in as part of the Tax Cut and Jobs Act is called a QSEHRA. Again, QSEHRA stands for qualified small employer health reimbursement arrangement.
With the QSEHRA, there are some rules that we must follow. First, the company must have less than 50 full-time employees, and the company cannot offer any type of insurance plan to the employees, no health insurance, dental insurance, vision insurance. You do not have to cover part-time employees. But if you have one part-time employee who is on the QSEHRA plan you have to offer all part-time employees QSEHRA plan. And it does have to be offered to all full-time employees.
The QSEHRA plan gives folks the ability to take some money and use it to buy health insurance. You are required to have a MEC, or minimal essential coverage, to be able to participate in the QSEHRA. Now, that does not mean that you cannot spend more on health insurance if you want to. You certainly can.
The idea with QSEHRA is, if the employer is kicking in money to this plan, they have such a small group that it would be impractical to try to get a group health insurance policy. But they can give money to their employees. It could be used for insurance premiums. If you happen to be able to get a net compliant plan where you do not use up all the money in the QSEHRA, again, it is like the other two arrangements. Co-pays, deductibles, out of pocket expenses can come out of QSEHRA as well.
Another little unique feature. I mentioned that employers can contribute to HSAs on their employees’ behalf. With QSEHRA, the employer is paying for all of it. Employees cannot contribute to a QSEHRA plan. Basically, the company sets up a monthly allowance. It is the maximum amount of tax-free money, and it is tax-free to the employees, fully deductible to the employer, just like health insurance premiums would be. But it is tax-free to the employees. You can offer up to $5,300 per year to folks who are single, married filing separately. In other words, their self only. It could be up to $10,700 per year for folks who have a family. With QSEHRA, normally you get a certain amount that goes into your account on a monthly basis. If you do leave the company, that QSEHRA plan does not go with you. It is not your money. By definition, it’s all the employer’s money so if you left company, it would go back to them.
I mentioned most business owners cannot participate in flexible spending arrangements. They could possibly, if they have the right kind of insurance, participate in a health savings account. If the owner is considered an employee, I’m talking to my S-corporation owners, and owns more 2% of the company, but is still considered to be an employee, you would be eligible for the QSEHRA arrangement on the same basis as your employees would.
The QSEHRA is a deduction in the business. It is not something that’s on your personal return.
In broad strokes, those are kind of the options that are available to small employers. There is one other arrangement if you do happen to operate in a C-corporation. You can have what is called a health reimbursement arrangement. It is an employee benefit, and you can reimburse healthcare expenses, 100% of them, actually. However, again, if you are going to cover the owner for that benefit, you must do the same thing for every employee you have. You are already on the hook for your healthcare expenses. That is one thing. It is something else entirely to put yourself on the hook for your employees’ healthcare expenses in an unlimited fashion, because that’s really what it would amount to.
Again, particularly for the flexible spending account and the QSEHRA, if you use a service like Paychecks or a payroll preparation service, they are almost invariably going to offer that as part of your payroll package. If you have specific questions about your specific situation, they would be the appropriate folks to ask.
This is not necessarily healthcare related, but we have been getting a lot of questions about the Employee Retention Credit recently. Originally, businesses had the option to either get the employee retention credit or take the PPP money. Then it was decided it was okay to double dip. When you can get the PPP money, you have to reduce the wages that you pay by the amount that you attributed to your PPP forgiveness. But the Employee Retention Credit is going to be a credit on your Form 941 on your payroll tax returns. I know that the payroll tax services are all over this. They are going to be asking you for a lot of the same information that you are going to be using to get your PPP loans forgiven. So, when your accountant or your bookkeeper comes up with all that for you, do not throw it away once you get your loan forgiven. Hang on to it because they are going to need that same information for the Employee Retention Credit.
Elhert: Thanks, Tom. All of that was very insightful. If you have any additional questions about the various healthcare reimbursement programs, please call us at (772) 257-7888.