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.
