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With the close of 2024 around the corner, it’s the ideal time for small business owners to review medical plan options and capitalize on tax-saving opportunities. Whether you’re a sole proprietor or have fewer than 50 employees, tax-advantaged medical plans like the Section 105 Health Reimbursement Arrangement (HRA), Qualified Small Employer HRA (QSEHRA), and Individual Coverage HRA (ICHRA) offer powerful ways to reduce taxable income and provide valuable benefits to yourself and your employees. Here’s a breakdown of these strategies, including real examples of the savings they can deliver.
1. The Section 105 Health Reimbursement Arrangement (HRA)
A Section 105 HRA is a popular choice for sole proprietors with just one employee, such as a spouse. This arrangement allows the business to reimburse the employee for out-of-pocket medical expenses, effectively making them a tax-deductible business expense.
Example:
Henry, a sole proprietor, employs his spouse as his only employee. This year, they expect $22,000 in medical expenses. Through a Section 105 HRA, Henry can reimburse his spouse for those expenses, turning what would be personal expenses into deductible business expenses(bradfordtaxinstitute.co…).
Item | Amount |
Medical Expenses | $22,000 |
Federal Income Tax Savings | $5,280 (24%) |
Self-Employment Tax Savings | $3,366 (15.3%) |
State Tax Savings (8%) | $1,760 |
Total Tax Savings | $10,406 |
Total Savings: By structuring these expenses through a 105-HRA, Henry’s total tax savings is $10,406—a clear advantage compared to paying these expenses out of pocket.
2. The Qualified Small Employer HRA (QSEHRA)
If you have fewer than 50 employees, QSEHRA allows you to reimburse employees for health insurance and medical expenses, up to an annual limit. For 2024, these limits are $6,150 for self-only coverage and $12,450 for family coverage. QSEHRAs don’t require the employer to provide group health insurance but still offer tax-free reimbursement.
Example:
Sarah runs a small graphic design business with three employees. She implements a QSEHRA with a maximum reimbursement of $5,000 per employee for individual coverage.
Employee | Medical Expenses Reimbursed | Federal Tax Savings (24%) | State Tax Savings (8%) | Payroll Tax Savings (15.3%) | Total Tax Savings |
Employee 1 | $5,000 | $1,200 | $400 | $765 | $2,365 |
Employee 2 | $5,000 | $1,200 | $400 | $765 | $2,365 |
Employee 3 | $5,000 | $1,200 | $400 | $765 | $2,365 |
Total Savings | $7,095 |
Total Savings: By offering a QSEHRA, Sarah’s business achieves $7,095 in tax savings, while providing employees with valuable health expense reimbursements without incurring payroll taxes.
3. Individual Coverage HRA (ICHRA)
The ICHRA allows businesses of any size to reimburse employees for individual health insurance premiums and medical expenses. This option works particularly well for employers who want to offer health benefits without committing to a group insurance plan.
Example:
Mark owns a consulting firm with eight employees. He decides to implement an ICHRA, setting a reimbursement limit of $4,000 per employee.
Employee | Health Insurance Premiums Reimbursed | Federal Tax Savings (24%) | State Tax Savings (8%) | Payroll Tax Savings (15.3%) | Total Tax Savings |
Employee 1 | $4,000 | $960 | $320 | $612 | $1,892 |
Employee 2 | $4,000 | $960 | $320 | $612 | $1,892 |
... | ... | ... | ... | ... | ... |
Employee 8 | $4,000 | $960 | $320 | $612 | $1,892 |
Total Savings | $15,136 |
Total Savings: By utilizing an ICHRA, Mark’s business saves $15,136 in taxes, while employees receive substantial support for their individual health coverage expenses.
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