Quick HRA Question

[Delta76]

Situation: Two employee S-corp with non-active owner. My prospect is an employee (manager), Dad is the non-active owner. One other full time employee. Son has individual health policy as does wife. Paying all medical expenses and premiums after tax. Wife has a crappy health plan, but is stuck due to being pregnant, so an HSA isn't an option for her.

My Thought: Set up an HRA through the business for the son that also allows wife to pay pregnancy costs with pre-tax business dollars (as I said before, son has no ownership interest in the business yet).

Two questions:
1. Since the son is considered a "manager", can we set it up only for the "manager" classification of employees and exclude the other employee?

2. Do any non-discrimination issues come into play as the son is compensated much better than the other employee? I still don't understand how this play into or doesn't play into HRA plans.

 

[Delta76]

I guess I'll have to wait for the wholesaler to shoot me an email back.

 

[somarco]

http://www.capitalbenefitsgroup.com/documents/HRA GUIDELINES.pdf

Section 105(h) sets forth nondiscrimination rules for self-insured medical expense reimbursement plans. To the extent an HRA is a self-insured medical expense reimbursement plan, the non-discrimination rules under §105(h) apply to the HRA. However, no guidance was provided on how to apply this to an HRA. § 1.105-11(c )(3)(ii) regarding operational discrimination in favor of highly compensated individuals (as defined in §105(h)) also applies. For instance, if an increase in maximum reimbursement amounts in an HRA favors one or more highly compensated individuals, the HRA may violate these non-discrimination rules.
Flex Administrators : HRA General Information

9. What are the non-discrimination requirements?

HRAs are subject to the non-discrimination rules contained in I.R.C. Section 105. Those rules prohibit discrimination in favor of highly compensated individuals as to eligibility to participate and the benefits provided by the HRA. Failure to follow these rules will result in reimbursements to all highly compensated employees being taxed.

Non-Discrimination Rules

1. Definition of Highly Compensated Individuals

a. one of the 5 highest paid officers
b. shareholders who own more than 10% of the company
c. one of the highest paid 25% of all employees

2. Eligibility Test

a. Plan must benefit at least 70% of all non-excludable employees; or
b. Plan must benefit at least 80% of all eligible employees and at least 70% of all non-excludable employees are eligible to join the plan
c. In order to be excluded for testing purposes, excludable employees also must be excluded from participation in the HRA by the terms of the plan
d. Excludable employees include:

employees with less than 3 years of service

employees who are under age 25

employees who are part-time or seasonal

employees covered by a collective bargaining agreement

employees who are non-resident aliens with no U.S. source income

3. Benefits Test

all benefits provided for participants who are highly compensated individuals must be provided for all other participants

the easiest way to conform to this requirement is to have uniform benefits for all employees

4. Taxation of Highly Compensated Individuals

Taxed on 100% of benefits not provided to all non-highly compensated individuals

Taxed on a fraction of benefits provided when eligibility test is not met based on amount of benefits provided to all highly compensated individuals divided by amount provided to all participants
HRA Regulations and Plan Design Options


http://www.coredocuments.com/image/HRA_Brochure2.pdf

 

[Delta76]

Thanks Somarco, that helps. I did a google search before posing the question and came up empty.

 

[somarco]

I just breezed through the links before posting. It looks like, on the surface, you would have a plan that unfairly discriminates in favor of an HCE.

If you find out something to the contrary, share it with us.

 

[Delta76]

If you find out something to the contrary, share it with us.

Will do, still waiting for my wholesaler to get back to me.

 

[somarco]

Sounds like more of a question for a knowledgeable tax person. Wouldn't trust someone in the biz to know.

Heck, some days I don't even trust myself . . .

 

[Delta76]

When I say wholesaler, I mean the sales rep for the administrator I typically use for setting up these plans. He has been a great resource in the past and really knows his business.

 

[Delta76]

By the way, the discrimination issue was a deal breaker after talking to two other sources, thanks for the insight Somarco. I believe the way around this is going to be a Sect. 125 plan without any sort of company contribution and the managers salary can always be increased. We'll see, my understanding is this is free of the Sect. 125 discrimination rules if no company conribution is made, just payroll deferrals.