Health Reimbursement Arrangements (HRAs) are employer-funded plans that allow a business to reimburse employees tax-free for qualified medical expenses such as co-payments, deductibles, and qualified health insurance premiums. HRAs are a popular small business health insurance solution because they allow the business to offer tax-free health benefits without the cost or complication of a traditional group health insurance plan.
While some types of business owners receive limited tax benefits in using an HRA, this is not the case with C-Corporation owners. C-Corporation owners receive all of the same tax benefits as W2 employees. For this reason, HRAs are an ideal solution for a C-Corporation owner, his or her family, and any W2 employees.
What is a C-Corporation?
A C-Corporation ("C-Corp") refers to any corporation that, under US federal income tax law, is taxed separately from its owner/s. A C-Corp is distinguished from an S-Corporation, which generally is not taxed separately. Most major companies (and many smaller companies) are treated as C-corporations for U.S. federal income tax purposes.
Why HRAs the Ideal Solution for C-Corporation Owners
C-Corp owners may use an HRA to reimburse themselves for medical expenses, as well as family member's medical expenses, and receive reimbursements 100% tax free. Additionally, all reimbursements issued from the business are tax-deductible.
In other words, both the business and the owner receives tax benefits (and cost savings) by using an HRA program. To summarize, the benefits of using an HRA for a C-Corporation owner are:
Owner and employees receive HRA reimbursements 100% tax free with no restrictions. (Reimbursements do not need to be reported as taxable income.)
The business's reimbursements are tax-deductible.
Qualified personal health insurance premiums and medical expenses can be run through the HRA, for the owner and family members.
The business can set up the HRA differently for different types of employees. For example, the owner could have a monthly HRA allowance of $1000 and other employees could have a monthly HRA allowance of $200.
Many owners and small businesses do not qualify for group health insurance, or cannot afford it. The HRA is a popular health benefits solution because of the flexibility, cost controls, and tax-benefits.
Tip: If you're an owner of a Sole Proprietorship, S-Corporation Owner, LLC, or you're a Partner see: HRA Eligibility by Type of Small Business Owner.
Tax Benefits of Health Reimbursement Arrangements
So, what are the tax benefits of an HRA? As mentioned previously, using an HRA allows the C-Corp owner to take advantage of tax benefits for themselves, their family, the business, and any W-2 employees.
1. Reimbursements Received are Tax-Free: Health insurance and medical expenses paid by an HRA that meet certain requirements are not taxable to the employees. The basic requirements are that 1) the HRA must be funded solely by the employer and 2) only substantiated medical expenses be reimbursed. An HRA does not qualify for exclusion of benefits from income tax if an employee has the option of receiving cash or some other taxable or non-taxable benefit other than the reimbursement of eligible medical care expenses.
Qualified medical expenses are those specified in the required HRA plan documents, and are generally those that would qualify for the itemized deduction for medical and dental expenses on Schedule A of Form 1040. These expenses are outlined in IRS Publication 502.
These tax advantages create significant cost-savings for the owner on their individual health insurance and medical expenses.
2. Reimbursements Paid by the Business are Tax-Deductible: All HRA reimbursements paid are tax-deductible to the business. The business saves on payroll taxes (FICA/FUTA).
What are your questions about how a C-Corporation owner can use an HRA? Let us know in the comments below and we'll answer them.