Healthcare Options Following the Small Business Healthcare Relief Act and the Eventual Repeal of Obamacare

Overview

The presidential inauguration has come and gone. The House and Senate are already clearing the way for the repeal of Obamacare. It is not clear yet whether the House or Senate have worthwhile options to replace the Affordable Care Act, but it is clear that they want it repealed as soon as possible. Undoubtedly, it is only matter of months before Obamacare is fully repealed and replaced.

In the aftermath of the presidential election and controversy over whether the inauguration committee could find any entertainment for the inaugural ball other than the local high school jazz band, the House and Senate both passed the Small Business Healthcare Relief Act as part of the 21st Century Cures Act in the first week of December 2016. The President signed the legislation on December 13, 2016. The legislation was effective on January 1, 2017.

One of the items that is appealing in this new legislation is the potential application for individual taxpayers. I have written in the past regarding my thoughts that every individual taxpayer is an accidental entrepreneur, i.e. a pink slip away from being self-employed. I have suggested that having one source of income aside from your job is not a bad idea. The range of possibilities for business ideas is endless. This business will provide the basis for a business structured as a corporation to provide an assortment of employee benefits for the employee(s) of the business. The business owner is an employee of the company that he owns and controls. The new business becomes the basis for being able to deduct all of the medical and dental expenses that are currently non-deductible on Schedule A in a tax favored manner.

Tax Deductibility of Medical Expenses as Itemized Deductions          

Currently, individual taxpayers deduct medical and dental expenses on Schedule A of Form 1040 to the extent that they exceed 10 percent of adjusted gross income (AGI). The deduction threshold is reduced to 7.5 percent of AGI for taxpayers that are age 65 or older. The reality is that most taxpayers are unable to deduct medical and dental expenses. Medical and dental deductions are not preference items for the alternative minimum tax.

Summary of the Small Business Healthcare Relief Act

The new legislation became available beginning on January 1, 2017. It is available to small employers defined as having than 50 fulltime employees who do not offer group health coverage to any of their employees. Small businesses can use the HRA to reimburse employees tax-free for individual health insurance premiums as well as other out-of-pocket medical expenses. Business owners may use the HRA to reimburse employees’ premium payments and other out-of-pocket medical and dental expenses on a tax-free basis. The payments are deductible to the corporation as business expenses and non-taxable to the employees.

Participants must have minimum essential coverage to receive HRA reimbursements. The HRA is one hundred percent employee funded and employees cannot contribute to the HRA. Employer contributions are capped for the employee and $10,000 for the coverage for the employee’s family. This level of coverage corresponds to the individual annual deductible in most medical coverage and family deductible for medical coverage. The employer will report the amount on employer contributions on Form W-2 for informational purposes.

Employees with individual coverage may access premium credits; however, premium credits are reduced by the allowance amount received. An employer must make the same HRA contributions available for all eligible employees; however, the amounts may be different based on family status.

The one-person HRA is similar in many respects to the qualified HRA except that plan participation is limited to a single participant. The one-person plan does not have any annual limit on employer contributions with respect to premium payments and out-of-pocket medical expenses. The one-person HRA also does not have the compliance requirement for reporting employer contributions on Form W-2. In my view, many individual taxpayers will have the opportunity to take advantage of the one-person HRA that insures the business owner as an employee of his own corporation with family coverage.

In the event the business owner operates the business as an LLC taxed as a partnership or S corporation or as a sole proprietorship, the business will need to establish a new corporation taxed as a C corporation to sponsor the HRA. Alternatively, the business owner may hire the spouse and obtain HRA coverage through the spouse as an employee.

Strategy Example

Bob Smith is an executive for a Fortune 500 company. He has a child that suffers from autism. The medical expenses that are unreimbursed by insurance are approximately $25,000 per year. These expenses are currently not deductible on Schedule A of Form 1040 because the expenses do not exceed 10 percent of AGI. Bob has the ability to provide consulting services outside of his day job. He additionally has the ability to provide management services to his personally owned real estate.

Bob forms a new corporation and elects to have the corporation taxed as a C corporation. He is the sole employee of the corporation. His attorney adopts a new one participant HRA. The plan provides for unlimited reimbursement of medical premiums and out-of-pocket medical expenses. These payments will be tax deductible to the corporation and non-taxable to Bob personally. The plan will allow Bob to deduct medical expenses that are currently non-deductible on Schedule A without creating additional taxable to himself and without any FICA/FUTA consequences.

Summary

The new legislation renews the availability of medical expenses reimbursement plans which have had a shadow of uncertainty over them following the passage of the Affordable Care Act. As the beginning of the repeal of Obamacare commences, the provisions of Obamacare continue until it is fully repealed. The new qualified HRA will outlive the repeal of Obamacare and continue to provide important tax benefits to small business owners and individual taxpayers who are willing to create a small business to facilitate the ability to earn income outside of their regular employment while maximizing the ability to adopt the tax benefits of various employee benefit programs that are available to small businesses.

Who knows what will come after Obamacare? Regardless of what lies ahead, the HRA offers powerful benefits for small business owners and their employees that are trying to reduce the cost of healthcare in a tax efficient manner. The same benefits are easily within the reach of individual taxpayers with a little creativity and ingenuity to form a new corporation to facilitate to adoption of a medical expense reimbursement plan.