Fringe Benefit Plans and the PPACA Tax Savings for the Small Business Owner

Agenda Why using the right plan is important Rising cost of healthcare One employee - IRS Section 105 & HRAs Where and How do HRAs work? Multiple employee / individual health plans Simple FSA Summary of Benefit Plans usage Examples Questions

Rising cost of healthcare According to The Kaiser Family Foundation’s Employer Health Benefits Annual Survey published in 2013, and titled, “Cost of Health Insurance,” the average annual premium for family coverage in 2012 is $15,745 There has been an increase in average family premiums of 134% since 1999

Rising cost of healthcare One in five families reported they experienced serious financial problems due to family medical bills in the past 12 month period. 27% put off or postponed getting needed medical care. 34% reported skipping dental care or checkups.

Rising cost of healthcare 2.3 trillion* in 2008 $4.6 trillion* by 2019 Every year more and more Americans lose their health insurance for one simple reason: they can’t afford it. *Source: Centers for Medicare & Medicaid Services “National Health Expenditure Projections ” – November 1st, 2010

HRAs are alive and well! Are employer-sponsored HRA Plans still legitimate?

What is a HRA? Converts normal insurance and out-of-pocket expenses into an employee benefit program and becomes 100% deductible! What is a Section 105 HRA? Section 105 is a 1954 tax law that allows for family employment

Who Qualifies for a HRA? Business with 1 “benefits-eligible” employee –Benefits eligible - employees may be excluded if they are: Part-time: working less than 25 hours per week Seasonal – working fewer than 7 months per year Are less than 25 years old Have been employed for less than 36 months with the business Basic HRAs cannot be used with more than 1 benefit- eligible employee unless integrated with a group insurance plan

What Business Entities Qualify? Sole Proprietor Partnership C-Corporation Non-Profit Limited Liability Company S-Corporation

How do HRAs work? 15.0 % Federal tax rate 5.2 %State tax rate 15.3 %Self-employment tax 35 %Total tax rate

2014 Comparison With HRA Premium Deduction 100% $9,299 x 100% = $9,299 Federal, State & SE Tax Rate $9,299 x 35.3% = $3,255 Tax Savings = $3,255 Non-Insured Expenses 100% $5,362 x 100% = $5,362 Federal, State & SE Tax 35.3% Tax Savings $1,877 Total Expenses $14,661 Total Deduction $14,661 Total Tax Savings $5,132 Without HRA Premium Deduction 100% $9,299 x 100% = $9,299 Federal Tax Rate $9,299 x 15% = $1,395 Tax Savings = $1,395 Non-Insured Expenses 0% $5,362 x 0% = $ 0 Federal & State Tax Tax Savings = $ 0 Total Expenses = $14,661 Total Deduction = $9,299 Total Tax Savings $1,395

Employers without Group Insurance can still offer pre-tax benefits

IRS Notice A company with more than one eligible employee will no longer receive a tax advantage through a HRA unless it sponsors group insurance

There Are Solutions No Limit Plan Non-Employer Sponsored Premium (NESP) Non-Excepted Health FSA Plan (NEFSA)

No Limit Plan 2+ employees / all are family members. The No Limit Plan is a self-funded health Plan that meets all Healthcare Market Reform requirements. There is no limit to the amount of insurance premiums or out-of-pocket medical expenses that can be reimbursed to your family-member employees. The following are reimbursable expenses under the No Limit Plan: –Insurance premiums –All out-of-pocket medical expenses

No Limit Plan Disclaimer: No Limit Plan increases risk to the business –Please be aware that the No Limit Plan could expose your business to an additional risk: having a high amount of medical claims written off through your business. –If you have employees who are not family members, this type of benefit Plan is not recommended.

Non-Employer Sponsored Premium 2+ employees with individual health plans Section 125 Plan - Employers May Continue to Reimburse Employees for Individual Premiums

Non-Employer Sponsored Premium The Non-Employer Sponsored Premium Account (NESP) is designed for employers and employees to contribute tax-free dollars toward individual health insurance.

Non-Excepted Health FSA Plan Both employers and employees may contribute tax- free dollars to help employees pay for eligible out-of- pocket medical expenses

Flexible Spending Accounts Section 125 Cafeteria Plan Pre-Tax Dollars Flexible Spending Accounts Medical Dependent Care Transportation Insurance Premiums Save between 25% and 40% Reduced Payroll Taxes

Who qualifies? Greater than 2% Shareholders of S-Corporations are excluded. Highly compensated employees are excluded.

SIMPLE Cafeteria Plans Provides new opportunities for some owners and highly compensated employees to participate where they could not in the past. A FSA Plan with no discrimination testing, but with a required employer contribution. For groups under 100 employees.

SIMPLE Cafeteria Plans Employer contributions to a SIMPLE Cafeteria Plan must be sufficient to provide benefits to non-highly compensated employees. Employers must choose one of the following contribution methods: –Uniform Contribution: A uniform percentage (at least 2%) of compensation, whether the employee does or does not make salary reduction contributions to the plan; or –Matching Contribution: The lesser of 2x the employee’s annual contribution, or 6% of the employee’s annual compensation.

Summary of Benefit Plans Family Only

One Employee HRA Example Bob and Nancy Johnson have three young children, own a farm, and have two part-time employees. Each year they have: –$10,000 in insurance premiums –$5,000 in out-of-pocket medical expenses No additional benefit-eligible employees They are able to write off all of their family’s medical expense as a business tax deduction on their Schedule F tax form Total savings $5,250 on federal, state and self- employment taxes for the year.

No Limit Plan Example Jim and Tracy Ledger are Sole Proprietors and own a farm. –Their Parents work on the farm full-time and year-round. –Jim and Tracey do not sponsor Group health insurance The enrolled in a No Limit Plan as they cannot offer a traditional HRA due to more than 1 benefit-eligible employee With the No Limit Plan, the ledgers save federal, state and self-employment taxes on all premiums and out-of- pocket medical expenses

NESP/NEFSA Plan Example Cucos Restaurant has 12 employees –Do not sponsor Group insurance due to the cost –The owners want to offer benefits to help attract new and retain existing employees Cucos implemented a NESP/NEFSA Plan Cucos’ employees were able to reduce their taxes by an average of 30% The Plan was cost-neutral to the business because of reduced payroll taxes (including Social Security and Medicare)

Multi-Employee Plan With Group Insurance Y&K Ranch has had an HRA for years When IRS Notice was implemented it had no impact on the ranch because they offered Group insurance Their Plan is considered an integrated HRA and is compliant with the new regulations

Questions Paul Cannon –TASC Regional Director –Total Administrative Services Corporation – Ext. 2654