It’s no secret that a spotlight has been on our country’s healthcare system for some time now — and a bright one at that. Health insurance options and expenditures are a real concern for agribusiness owners and it’s hard to know what options will best fit the needs of your operation. Rest assured there are options; some that can even put money back your pocket.
Health Reimbursement Arrangements (HRAs) are based upon Section 105 of the Internal Revenue Code. These particular arraignments allow farmers who qualify to deduct 100% of family medical cost against the farm income. In turn, the taxpayer saves federal, state and FICA taxes for family medical costs (typically a 35% savings).
This is done by declaring medical expenses as business expenses, not as Schedule A itemized personal deductions, which are often limited or lost. What’s the catch here you ask? Whether they file as sole proprietor or an LLC, farmers must have a spouse who is employed by their business, at least on a part-time basis. More and more farmers are putting their spouse on the payroll in order to take advantage of HRAs.
A Section 4 105 Plan allows a qualified farmer to benefit by deducting 100% of:
- Health Insurance and dental insurance premiums for eligible employee(s) and family. This also includes qualified long-term care insurance.
- Uninsured (out of pocket) medical, dental and vision care expenses for eligible employee(s) and family.
- Chiropractic, medical supplies, contact lenses, hearing aids, Medicare Part A, Medicare Supplemental, optical/vision, and cancer insurance premiums for eligible employee(s).
Let’s take a look at scenario that would qualify: Joe owns and runs a farm. His wife, Jane, helps in the fields and takes care of some financial records and administrative functions for the farming business. Because Jane is already a service to the farm operation, Joe makes her a true employee and begins providing her with compensation. They are now eligible for HRAs.
Joe compensates Jane a total of $14,000 per year in the following way:
|1. Reimbursement for family health premiums:||$7,000|
|2. Reimbursements for uninsured medical expenses:||$5,000|
|3. W-2 Cash Wages:||$2,000|
By allowing for a 100% federal, state and FICA tax deduction of the $12,000 of reimbursed expenses, Joe would receive $4,200 in actual tax dollar savings by taking advantage of a Section 105 Plan. (Note: the tax savings is assuming rates of 15% federal, 5% state and 15% FICA taxes=35% savings).
It’s important to note that farmers who file as C corporations don’t need to abide by the spouse/employee method. The corporation is viewed as the employer in this case and the owner is an employee as long as the employee is receiving scheduled pay. Also note farm entities and sole proprietors with two or more employees may not be eligible for this special deduction because at the two or more employee threshold the new Affordable Health Care Act rules require certain “essential health benefits” (group insurance) and the Section 105 HRA rules may not apply. If you have two or more employees, we advise you consult your accountant for other potential health care solutions.
AgriPlanNOW and BizPlanNOW is a couple of the HRAs you may have heard about. HRAs like these aren’t too confused with actual insurance plans. These are reimbursement programs that you must enroll in and there are annual fees, but the savings they provide far outweigh the upfront costs. Once enrolled, you will work with your insurance provider and tax professional to lower your out-of-pocket costs. Because you’re medical costs are now classified as business expenses you will see your deductions increase and tax savings will be the result. Savings will of course vary, but the average is around $5,000 per year.
Once you submit an application for an HRA and you are enrolled, then it becomes vital to keep receipts and all records of medical expenses and health insurance premiums as well as payroll transactions. All this information will need to be reviewed and submitted at year-end by your tax professional. A CPA with experience in working with agribusiness professionals can assist you with proper record keeping and of course the tax reporting piece of the puzzle.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves.