Executive Benefits Design
What is an HRA?
GENERAL INFORMATION
What is an HRA?
An HRA is a federally approved funding program that enables employers to reimburse employees for a portion of their health care expenses.
Are there restrictions on who can participate in an HRA?
The IRS has ruled that only employees and their spouses and dependents qualify for HRA reimbursements. Therefore, self-employed individuals do not qualify for an HRA.
In the past, the IRS has ruled that shareholders who own more than 2% stock in a Sub chapter S Corporation should not be treated as employees for purposes of applyingthe fringe benefits rules. Finally, partners generally are considered self-employed and wouldnot qualify as employees.
Are LLCs treated the same as an S corporation for HRA purposes?
If the Limited Liability Corporation (LLC) is treated as an S Corporation for federal income tax purposes, it seems that the same rules would apply. However, if the LLC elects to be taxed as a C corp for federal income tax purposes, it may be possible for the owners to participate in an HRA plan.
Does a self-employed individual (including a partner), who offers and HRA to employees have other options to reduce his/her health care expenses?
Yes, the self- employed individual may be eligible for a Health Savings Account (HAS) for him/herself and still set up the HRA for employees.
Can the employee contribute to an HRA either directly or through salary Reduction?
No, an HRA is solely employer-sponsored.
TAX QUESTIONS
Are HRA reimbursements tax deductible for the employer?
Yes, reimbursements made by the employer are tax deductible after they are paid to the employee.
Are HRA reimbursements taxable income for the employees?
No, HRA reimbursements for qualified expenses are received tax-free.