By Jason Watson (Google+)
Posted September 2, 2014
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If you have more than one employee, your world will be much different. Under the Affordable Care Act, or perhaps the Unaffordable Care Act, Section 105 HRAs are out unless you have an integrated HRA as described earlier. The only thing left is a Section 125 Cafeteria Plan (sometimes called Flexible Spending Arrangement or FSA).
If you attempt to reimburse your employees directly for their health insurance premium or provide any type of stipend toward that expense, you are violating IRS, DOL and ACA rules. The fines are big. Your only option is to adopt a Section 125 Cafeteria Plan, or gross up employee wages and pay all kinds of unnecessary taxes.
Note: Section 125 Cafeteria Plans are the middle of some controversy right now. IRS Notice 2013-54 suggests that Cafeteria Plans cannot be offered without a group health insurance plan. However, some third-party administrators (TPAs) such as TASC are suggesting otherwise. WCG (formerly Watson CPA Group) does not know which way this will go when litigated, so use caution if you decide to implement a Section 125 Cafeteria Plan without group health insurance.
Read TASC’s memorandum on the subject.
If you offer group health insurance it also behooves you to adopt a Cafeteria Plan. This allows for the pre-tax deduction of health insurance premiums plus the benefits of flexible spending accounts for out of pocket medical expenses and dependent care benefits.
Remember, owners and partners are not eligible for Cafeteria Plans since they have other options. But this does not preclude you from hiring your spouse to enjoy in these benefits.
Combination Plans
There are advantages to adopting multiple plans, such as a Health Savings Account (HSA) and Section 125 Cafeteria Plan. Or, an HSA and Section 105 Health Reimbursement Arrangement. But there are some rules of course. When you do this, you are essentially creating a limited purpose plan.
Let’s make some assumptions- you have $6,000 in your HSA and Junior needs $5,000 in orthodontics. Under the limited purpose plan arrangement, you would pay for the dental expenses through your Section 105 or 125 plan first, leaving your HSA intact. The same holds for $5,000 in Lasik. So, dental and vision expenses would be paid through the Section 105 or 125 plan first. Not required, but more ideal.
However, same scenario, but $5,000 in non-dental or non-vision expenses such as prescriptions. You must use your HSA first. No choice. Priority ordering.
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