Health reimbursements or MSAs can help with health insurance costs

Are you a small business owner or selfemployed?

Healthcare costs are continuing

their relentless assault on small businesses.

There are two critical

questions that impact

the success of small

business: Can you

afford health insurance

for your business? Can

you keep up with competition

by offering an attractive plan? On

a consistent basis small employers' healthcare

premiums have increased at least 15

percent for the past five to 10 years.

Forecasts for the next 10 years predict

equal or greater increases on an annual

basis. There are several ways to manage

these costs and keep good employees: a)

deduct 100 percent of your healthcare costs

by enrolling in an IRS-approved plan; b)

consider starting an Archer Medical Savings

Account plan or (MSA).

An IRS approved health reimbursement

arrangement (HRA) under Section 105 can

allow you to deduct 100 percent of your

healthcare costs. This plan especially benefits

the self-employed. Originally, the HRA

was designed to assist farming families

afford the high cost of health care costs.

The law's intent was to assist farmers afford

health insurance and out-of-pocket healthcare

costs for their families. Today, the selfemployed

may find this health reimbursement

arrangement beneficial as long as they

follow the rules for the Section 105 plan:

The Section 105 plan provides tax benefits

for out-of-pocket expenses and health

insurance premium expenses. The plan

requires that the business owner apply for a

Federal Identification Number for the plan;

establish a written and viable employment

agreement with your spouse for hours

worked on a monthly basis; notify your

health insurance company that you will be

changing the name of the policy to your

spouse/employee; set up a separate Section

105 checking account for your spouse to

deposit earnings, medical reimbursements

and expenses (i.e. health insurance premiums

and out-of-pocket expenses such as copays

and prescriptions); prepare regular,

monthly, quarterly and annual employment

tax reports (e.g. federal 941 and 940 reports,

and W-2 forms and related state tax reports

as appropriate); file claims to your insurance

carrier as usual; keep written records and file

all unreimbursed healthcare expenses separately

to show compliance with the Section

105 plan record keeping.

There are several providers of Section

105 (HRA) plans. To search for providers

of Section 105 plans, do a key-word search

on the Internet or call local health insurance

providers for more information.

Another option for small employers is to

consider starting an Archer Medical Savings

Account plan or "MSA." This plan has

been named after the former U.S.

Congressman Bill Archer. MSAs are available

to employers who have 50 or fewer

employees. The MSA rules require the

employer to setup a "high deductible insurance

policy."The idea is that the employer

or the employee (not both) contributes to a

MSA monthly to the account to take care

of healthcare expenses other than catastrophic

or major medical needs.

The major benefits of an MSA for the

employer are that the employer can make

direct, tax-deductible contributions to the

accounts; medical distributions are tax free;

when the account holder reaches age 65,

distributions that are not for medical reasons

avoid a tax penalty, and the MSA can

be used as a retirement account as well as a

medical savings account: The IRS allows

for investment of funds in securities such as

stocks, bonds, and related securities. In

considering an MSA for your business compare

the MSA to your current insurance

policy. There should be a considerable discount

for an MSA to be worthwhile - 25 to

50 percent savings. Be sure to include the

tax benefits, contributions, and premiums in

your analysis.

For the year 2002, the minimum contribution

for a single person is $1,072.50

and for families the minimum is $2,475.

The contributions represent 65

percent and 75 percent respectively of the

annual deductible required before the

insurance covers healthcare expenses

for singles, $1,650, for families, $3,300.

MSAs require that the employer and

employees have no other health plan in

effect and eligibility is based on a monthby-

month status. The account holder of

the MSA will still qualify for other healthcare

coverage if the healthcare policies are

for specific care such as vision care, dental

care, and accident policies. The MSA rules

require a plan administrator that accounts

for, invests contributions and records all

distributions annually. For more information

seek guidance from your insurance

and tax professionals.

Scott T. Wait is a Reno CPA and a certified

tax resolution specialist. His e-mail

address is at stwwait@bigfoot.com.