Author Topic: LLC/S-corp Eligibility to Set up an FSA  (Read 1072 times)

Laserjet3051

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LLC/S-corp Eligibility to Set up an FSA
« on: March 08, 2017, 05:52:24 PM »
I operate and own (100%) an LLC/S-corp and would like to set up a FSA in order to use pre-tax dollars for routine medical 7 dental expenses not covered by my insurance. Is there any reason why I might be disqualified in setting up such an FSA? I should note that I employ myself through a payroll/W2 mechanism.

Your input is greatly appreciated.

SeattleCPA

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #1 on: March 08, 2017, 07:22:53 PM »
Why wouldn't you use a Sec. 105(b) plan? Wouldn't that be easier in your single employee situation?

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #2 on: March 09, 2017, 06:01:48 AM »
Why wouldn't you use a Sec. 105(b) plan? Wouldn't that be easier in your single employee situation?

I just set one of these up last week using Core Documents after consultation with my accountant and asking a lot of questions about ACA compatibility. Short answer: they're totally legal for one-employee LLC S-corps, even if that employee is the owner. I set mine up with an HSA-compatible deductible ($1300 individual, $2600 family) so I can save the max in my HSA and also reimburse myself for most expenses from the HRA.

This $149 investment instantly saved me almost $2,500 on taxes because we already maxed our out of pocket limit for the year. Bonus: both reimbursements and HSA contributions count as W-2 box 1 income but they don't count for FICA, so I also get to contribute an additional 25% of my reimbursements and HSA contributions to my solo 401(k).

SeattleCPA

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #3 on: March 09, 2017, 07:09:54 AM »
Why wouldn't you use a Sec. 105(b) plan? Wouldn't that be easier in your single employee situation?

I just set one of these up last week using Core Documents after consultation with my accountant and asking a lot of questions about ACA compatibility. Short answer: they're totally legal for one-employee LLC S-corps, even if that employee is the owner. I set mine up with an HSA-compatible deductible ($1300 individual, $2600 family) so I can save the max in my HSA and also reimburse myself for most expenses from the HRA.

This $149 investment instantly saved me almost $2,500 on taxes because we already maxed our out of pocket limit for the year. Bonus: both reimbursements and HSA contributions count as W-2 box 1 income but they don't count for FICA, so I also get to contribute an additional 25% of my reimbursements and HSA contributions to my solo 401(k).

I haven't looked at the plan document you reference, but in general I think that's the way they work. And I agree that a one person business operating as an S corporation can do this under Obamacare because there's no group plan here.

One other thing I think you need to look at is whether you have enough box 5 earnings on your W-2 to get the self-employed health insurance deduction. I.e., if you have (say) $20,000 in box 1 but $0 in box 3 and box 5, you save payroll taxes but I think you'll lose your self-employed health insurance income tax deduction.

I mention this because sometimes people set up these Sec. 105(b) plans (aka healthcare reimbursement arrangements) in a side hustle to pay healthcare expenses... the gambit might work to save payroll taxes. But it doesn't save income taxes.

BTW, just to go way out into the weeds on this, a small business might also want to consider the new qualified small employer health reimbursement arrangement now available:

http://evergreensmallbusiness.com/qualified-small-employer-health-reimbursement-arrangement-rules/

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #4 on: March 09, 2017, 08:51:07 AM »
Why wouldn't you use a Sec. 105(b) plan? Wouldn't that be easier in your single employee situation?

I just set one of these up last week using Core Documents after consultation with my accountant and asking a lot of questions about ACA compatibility. Short answer: they're totally legal for one-employee LLC S-corps, even if that employee is the owner. I set mine up with an HSA-compatible deductible ($1300 individual, $2600 family) so I can save the max in my HSA and also reimburse myself for most expenses from the HRA.

This $149 investment instantly saved me almost $2,500 on taxes because we already maxed our out of pocket limit for the year. Bonus: both reimbursements and HSA contributions count as W-2 box 1 income but they don't count for FICA, so I also get to contribute an additional 25% of my reimbursements and HSA contributions to my solo 401(k).

I haven't looked at the plan document you reference, but in general I think that's the way they work. And I agree that a one person business operating as an S corporation can do this under Obamacare because there's no group plan here.

One other thing I think you need to look at is whether you have enough box 5 earnings on your W-2 to get the self-employed health insurance deduction. I.e., if you have (say) $20,000 in box 1 but $0 in box 3 and box 5, you save payroll taxes but I think you'll lose your self-employed health insurance income tax deduction.

I mention this because sometimes people set up these Sec. 105(b) plans (aka healthcare reimbursement arrangements) in a side hustle to pay healthcare expenses... the gambit might work to save payroll taxes. But it doesn't save income taxes.

BTW, just to go way out into the weeds on this, a small business might also want to consider the new qualified small employer health reimbursement arrangement now available:

http://evergreensmallbusiness.com/qualified-small-employer-health-reimbursement-arrangement-rules/

Thanks for the tip! I'm not the OP but I'll definitely have enough in boxes 3 and 5. We don't get too aggressive with the W2/dividend split and this is my main gig.

Laserjet3051

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #5 on: March 15, 2017, 06:12:50 PM »
Why wouldn't you use a Sec. 105(b) plan? Wouldn't that be easier in your single employee situation?

My research indicates that S-Corporation owners (> 2% shares)  may participate in a Sec. 105(b) plan but have limited eligibility for tax advantages. If this is true, then there is little value in setting up such a plan, since I am a >2% share owner of my S-corp. Am I misunderstanding something here?

SeattleCPA

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #6 on: March 16, 2017, 06:55:13 AM »
Why wouldn't you use a Sec. 105(b) plan? Wouldn't that be easier in your single employee situation?

My research indicates that S-Corporation owners (> 2% shares)  may participate in a Sec. 105(b) plan but have limited eligibility for tax advantages. If this is true, then there is little value in setting up such a plan, since I am a >2% share owner of my S-corp. Am I misunderstanding something here?

Can you point us to some specific issue? Maybe even a link to someone discussing the issues you've researched?

Christopher V

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #7 on: July 13, 2017, 06:40:40 PM »
Why wouldn't you use a Sec. 105(b) plan? Wouldn't that be easier in your single employee situation?

I just set one of these up last week using Core Documents after consultation with my accountant and asking a lot of questions about ACA compatibility. Short answer: they're totally legal for one-employee LLC S-corps, even if that employee is the owner. I set mine up with an HSA-compatible deductible ($1300 individual, $2600 family) so I can save the max in my HSA and also reimburse myself for most expenses from the HRA.

This $149 investment instantly saved me almost $2,500 on taxes because we already maxed our out of pocket limit for the year. Bonus: both reimbursements and HSA contributions count as W-2 box 1 income but they don't count for FICA, so I also get to contribute an additional 25% of my reimbursements and HSA contributions to my solo 401(k).

Hello there, @Protostache!  Thank you for your comments ... they are very informative!  I am very interested in doing the same with my healthcare as you have outlined.  I am a 100% s-corp owner and I have some of the very questions that I am sure you had.  Please, if you have the chance, I would appreciate some help!  Thank you so much!
1.  In addition to reimbursing healthcare premiums, do both HSA contributions and HRA reimbursements get put into W-2 box 1 as income (but not FICA)?
2.  Can you explain what you mean by being able to contribute an additional 25% of your HRA reimbursements and HSA contributions to your solo 401(k)?  This sounds pretty sweet!
3.  Is there an annual limit/cap specific to 2%+ s-corp owners for HRA reimbursements?  How about the HSA contributions?
4.  I'm curious.  Does your s-corp pay for your insurance premiums directly?  Or do you get reimbursed via an Accountable Plan?
5.  Do your HRA reimbursements get paid to you via Payroll, then taking out the taxes at the same time?  Or does your payroll do "zero dollar paychecks" for the s-corp healthcare, then personally owing a "tax loan" to the s-corp?  I'm using Intuit Online Payroll and mine does the $0 paychecks.  I'm wrapping my head around this...
6.  The $149 HRA deal thru Core Documents sounds great!  Are you administering the HRA yourself?  Do you need to pay for any other outside serves?  I've found a few HR outlets that offer HRA services like zenefits.com and www.TakeCommandHealth.com.  Is a service like this necessary?  Or can I simply reimburse myself health expenses, as long as I have the paperwork formed by Core Documents or similar?
7.  Lastly, I am looking for a new health insurance plan with an HSA attached.  If I purchase on the Health Marketplace / Exchange and get any sort of credit ... does that still entitle me to health premium reimbursement thru the s-corp?
~
Thanks again!  I greatly appreciate your time!

Christopher V

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #8 on: July 14, 2017, 04:49:57 AM »
One other thing I think you need to look at is whether you have enough box 5 earnings on your W-2 to get the self-employed health insurance deduction. I.e., if you have (say) $20,000 in box 1 but $0 in box 3 and box 5, you save payroll taxes but I think you'll lose your self-employed health insurance income tax deduction.

Hello there, one more question that I haven't been able to find info to in my searching.  Is there a certain number or percentage that is "enough" to be in box 5 on your W-2 to get the self-employed health insurance deduction?  Thanks!

Heroes821

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #9 on: July 14, 2017, 06:26:14 AM »
Posting to follow when 2018 health insurance opens again.