Author Topic: LLC/S-corp Eligibility to Set up an FSA  (Read 5234 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.

live4soccer7

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #10 on: November 21, 2017, 01:35:17 PM »
Can anyone provide more details on this?

I currently pay for my health plan as an individual and not through my business (Single Employee S-corp/llc). Implementing this method seems like it will save money come tax time, however I haven't been able to really find much online. Any info, I'm sure, would help myself and a lot of others out there.

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #11 on: November 21, 2017, 01:55:01 PM »
Can anyone provide more details on this?

I currently pay for my health plan as an individual and not through my business (Single Employee S-corp/llc). Implementing this method seems like it will save money come tax time, however I haven't been able to really find much online. Any info, I'm sure, would help myself and a lot of others out there.

As a business owner, if you're not eligible for employer-provided health insurance (through a W2 job or a spouse) then you can deduct the full cost of the premiums you pay (minus any ACA subsidies) on your personal 1040. It doesn't matter if the plan is in your name or the business' name, nor does it matter who actually pays for it, you or the business. Form 1040 29.

Beyond that, if you want to open a section 105 plan just follow the link I posted earlier in the thread. Core Documents is easy to work with and will get it set up for you quickly.

live4soccer7

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #12 on: November 22, 2017, 12:29:48 AM »
Please excuse my ignorance here. I did speak with core documents today for a few minutes.

What would be the benefit of the 105 plan in my situation?

LLC/S-Corp
I'm the sole Employee
I can't remember the last time I had to go to the doctor besides an ER trip a few years back for a kidney stone, which I will not go for again since I know what it is and that I likely won't die.
Not married and don't have kids

From what I understand, the 105 plan is for HRA, which only kicks in after the full deductible is met on the health plan and then after that health expenses can be deductible from the business standpoint up to a certain amount, correct?

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #13 on: November 22, 2017, 09:03:53 AM »
Please excuse my ignorance here. I did speak with core documents today for a few minutes.

What would be the benefit of the 105 plan in my situation?

LLC/S-Corp
I'm the sole Employee
I can't remember the last time I had to go to the doctor besides an ER trip a few years back for a kidney stone, which I will not go for again since I know what it is and that I likely won't die.
Not married and don't have kids

From what I understand, the 105 plan is for HRA, which only kicks in after the full deductible is met on the health plan and then after that health expenses can be deductible from the business standpoint up to a certain amount, correct?

Not quite. A 105 HRA is a separate plan that allows you to deduct medical expenses other than premiums. Think of it as a gap filler. You can use the HRA to pay for expenses pre-tax that your major medical plan doesn't cover, including amounts paid toward your major medical deductible and copays.

The basic advantage for someone in your situation would be to allow you to write off your deductible for income and payroll tax purposes. Your S-corp "reasonable" salary would then be two components: cash and HRA reimbursements.

If you're funding an HRA in the same year as you're using your HRA your HRA will have an additional deductible to make it HSA-compatible. You would typically set this at the minimum HDHP-compatible deductible.

live4soccer7

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #14 on: November 22, 2017, 12:10:38 PM »
Wow. Thank you for that information!

To clarify one step further, I can purchase HDHP (which I have for 2016 and will for 2017) that qualifies for an HSA and setup an HSA at a custodian (HSA Bank, for example) and then my employer (My LLC/S-Corp) can setup an HRA, correct?

This would effectively give me both simultaneously, correct?


I suppose, if that is correct then do I HAVE to contribute to the HRA as I'd assume funds are only tax deductible if used by the employee or is it deductible from the business standpoint as soon as the business contributes to the HRA?

I found this link: https://www.connectyourcare.com/tools/account-comparison/
May be paired with FSA, DCAP, PRA. IF paired with an HSA, must be limited to amounts over the deductible or to dental/vision only

Is this not applicable because the HSA is individually sponsored and the HRA is through the business?


I want to thank you VERY much for your guidance on this, it is truly appreciated.
« Last Edit: November 22, 2017, 12:20:55 PM by live4soccer7 »

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #15 on: November 22, 2017, 08:11:50 PM »
Wow. Thank you for that information!

To clarify one step further, I can purchase HDHP (which I have for 2016 and will for 2017) that qualifies for an HSA and setup an HSA at a custodian (HSA Bank, for example) and then my employer (My LLC/S-Corp) can setup an HRA, correct?

This would effectively give me both simultaneously, correct?


I suppose, if that is correct then do I HAVE to contribute to the HRA as I'd assume funds are only tax deductible if used by the employee or is it deductible from the business standpoint as soon as the business contributes to the HRA?

I found this link: https://www.connectyourcare.com/tools/account-comparison/
May be paired with FSA, DCAP, PRA. IF paired with an HSA, must be limited to amounts over the deductible or to dental/vision only

Is this not applicable because the HSA is individually sponsored and the HRA is through the business?


I want to thank you VERY much for your guidance on this, it is truly appreciated.

Don't think of an HRA as a "funded" thing. You can carry funds from year to year, but you don't get a deduction until you actually claim expenses on it which means carry over doesn't help you in an S-corp scenario.

Instead, think of it as an expense account. You pay for medical expenses with your personal funds, then have the business reimburse you by filling out the form that Core Documents gives you and telling your payroll company how much the reimbursement is. This income type will get federal withholding applied but it won't get social security or medicare applied. At the end of the year you'll file your 1040 and include this HRA income in the self-employed health insurance box, thus deducting it from your federal and state taxes.

You absolutely can have an HSA and an HRA in the same year. If you do, however, you have to make the HRA "HSA compatible" by using the minimum HDHP deductible ($1,350 for 2018). That means you'll file claims for all of your out of pocket medical expenses that your HDHP doesn't pay (copay, deductible) but the HRA won't reimburse until you hit $1,350. I believe the HRA can pay for dental and vision (assuming your HDHP doesn't cover dental or vision) from the first dollar even if you're contributing to an HSA.

This is exactly what we did for 2017. Our HDHP has a $8000 family deductible and $9000 out of pocket max. We filed claims with the HRA for all $8000 of the deductible plus the next $1000 of copays and coinsurance. The HRA paid out $7,700 ($9000 - $1300 minimum deductible), plus all of the dental expenses we had this year. In addition to that, we contributed the max to our HSA.

live4soccer7

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #16 on: November 24, 2017, 12:50:07 PM »
Does one have to buy a new core document every year or is it more of a one time deal?

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #17 on: November 24, 2017, 04:17:51 PM »
One time thing, unless the laws change or you need to update the plan for some other reason.

live4soccer7

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #18 on: November 26, 2017, 09:53:31 PM »
Thank you very much!

Altons Bobs

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #19 on: November 28, 2017, 07:41:20 PM »
Take a look at this, they're saying a single person LLC or Sole Proprietorship or S-corp owner cannot participate in HRA:

https://www.zanebenefits.com/blog/business-owner-eligibility-under-a-qsehra-infographic

Are they wrong?

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #20 on: November 29, 2017, 04:43:39 AM »
Thatís about a slightly different thing called a QSEHRA. It can be used to pay for premiums, unlike a traditional HRA. Owners can already deduct premiums on their individual taxes, so the QSEHRA doesnít make sense for a single owner S-Corp with no non-owner employees.

Altons Bobs

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #21 on: November 29, 2017, 10:08:10 AM »
Thatís about a slightly different thing called a QSEHRA. It can be used to pay for premiums, unlike a traditional HRA. Owners can already deduct premiums on their individual taxes, so the QSEHRA doesnít make sense for a single owner S-Corp with no non-owner employees.

So you're saying a single owner with no other employees S-corp can do traditional HRA with double dipping into HSA?

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #22 on: November 29, 2017, 11:28:24 AM »
Thatís about a slightly different thing called a QSEHRA. It can be used to pay for premiums, unlike a traditional HRA. Owners can already deduct premiums on their individual taxes, so the QSEHRA doesnít make sense for a single owner S-Corp with no non-owner employees.

So you're saying a single owner with no other employees S-corp can do traditional HRA with double dipping into HSA?

Yes. Single owner S-corps are exempt from most of the ACA reforms, including the HRA restrictions.

Altons Bobs

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #23 on: November 29, 2017, 12:43:20 PM »
Thatís about a slightly different thing called a QSEHRA. It can be used to pay for premiums, unlike a traditional HRA. Owners can already deduct premiums on their individual taxes, so the QSEHRA doesnít make sense for a single owner S-Corp with no non-owner employees.

So you're saying a single owner with no other employees S-corp can do traditional HRA with double dipping into HSA?

Yes. Single owner S-corps are exempt from most of the ACA reforms, including the HRA restrictions.

Do you know of an IRS article that states this?

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #24 on: November 29, 2017, 01:47:24 PM »
Thatís about a slightly different thing called a QSEHRA. It can be used to pay for premiums, unlike a traditional HRA. Owners can already deduct premiums on their individual taxes, so the QSEHRA doesnít make sense for a single owner S-Corp with no non-owner employees.

So you're saying a single owner with no other employees S-corp can do traditional HRA with double dipping into HSA?

Yes. Single owner S-corps are exempt from most of the ACA reforms, including the HRA restrictions.

Do you know of an IRS article that states this?

S Corporation Compensation and Medical Insurance Issues

Quote
The excise tax for failure to satisfy the ACA market reforms generally will not be imposed on an S corporation in the following two situations:

1. The S corporation provides medical benefits under a health plan that satisfies the ACA market reform requirements(for example, a group health plan that does not provide for reimbursement of individual policy premiums); or

2. No more than one active employee participates in the employer payment plan under which the S corporation reimburses the cost of individual policy premiums.

The ACA market reform provisions do not apply to plans that cover fewer than two participants who are active employees. IRC ß 9831(a)(2).

Altons Bobs

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #25 on: December 02, 2017, 03:39:49 PM »
Thatís about a slightly different thing called a QSEHRA. It can be used to pay for premiums, unlike a traditional HRA. Owners can already deduct premiums on their individual taxes, so the QSEHRA doesnít make sense for a single owner S-Corp with no non-owner employees.

So you're saying a single owner with no other employees S-corp can do traditional HRA with double dipping into HSA?

Yes. Single owner S-corps are exempt from most of the ACA reforms, including the HRA restrictions.

Do you know of an IRS article that states this?

S Corporation Compensation and Medical Insurance Issues

Quote
The excise tax for failure to satisfy the ACA market reforms generally will not be imposed on an S corporation in the following two situations:

1. The S corporation provides medical benefits under a health plan that satisfies the ACA market reform requirements(for example, a group health plan that does not provide for reimbursement of individual policy premiums); or

2. No more than one active employee participates in the employer payment plan under which the S corporation reimburses the cost of individual policy premiums.

The ACA market reform provisions do not apply to plans that cover fewer than two participants who are active employees. IRC ß 9831(a)(2).

I don't find anything in the IRS article you linked above about HRA or Section 105, can you point me to the correct article please?

protostache

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Re: LLC/S-corp Eligibility to Set up an FSA
« Reply #26 on: December 02, 2017, 08:39:30 PM »
Thatís about a slightly different thing called a QSEHRA. It can be used to pay for premiums, unlike a traditional HRA. Owners can already deduct premiums on their individual taxes, so the QSEHRA doesnít make sense for a single owner S-Corp with no non-owner employees.
So you're saying a single owner with no other employees S-corp can do traditional HRA with double dipping into HSA?

Yes. Single owner S-corps are exempt from most of the ACA reforms, including the HRA restrictions.

Do you know of an IRS article that states this?

S Corporation Compensation and Medical Insurance Issues

Quote
The excise tax for failure to satisfy the ACA market reforms generally will not be imposed on an S corporation in the following two situations:

1. The S corporation provides medical benefits under a health plan that satisfies the ACA market reform requirements(for example, a group health plan that does not provide for reimbursement of individual policy premiums); or

2. No more than one active employee participates in the employer payment plan under which the S corporation reimburses the cost of individual policy premiums.

The ACA market reform provisions do not apply to plans that cover fewer than two participants who are active employees. IRC ß 9831(a)(2).

I don't find anything in the IRS article you linked above about HRA or Section 105, can you point me to the correct article please?

I googled for "hra group plan site:irs.gov" and this was literally the first result.

Quote
Code ß 9831(a)(2) provides that the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year. Accordingly, an arrangement covering only a single employee (whether or not that employee is a 2-percent shareholder-employee) generally is not subject to the market reforms whether or not such a reimbursement arrangement otherwise constitutes a group health plan.

Ordinary Section 105 HRAs aren't really codified, they're the result of a number of different regulations and private letter rulings over the years. Nonetheless, the IRS has issued a number of notices about them over the years. 2015-17 is the latest.