Tom Gibson, CPA, discusses the rules and benefits of the different reimbursement plans available, including:
• Health Savings Accounts,
• Flexible Spending Accounts, and
• Qualified Small Employer Health Reimbursement Arrangements (QSEHRA)
Transcript (edited for clarity)
Welcome to “Making Healthcare Strategies and Reimbursement Plans Work for You.” My name is Tom Gibson. I have been a CPA in Tennessee since 1991. I also hold a license in Florida.
This is always a big issue of concern and normally a topic of discussion for a lot of our clients, healthcare which of course includes health insurance. It can be very expensive. And so we’re going to talk about some different approaches to dealing with expense. We’re specifically going to focus on health savings accounts (HSAs), flexible spending accounts (FSAs), a new entrant into the healthcare cost containment field – the QSEHRAs plan – and then just a little bit on full-blown medical reimbursement plans.
The difficulty with medical expenses – and when I say medical, it really encompasses medical, dental, any type of healthcare expense and of course there is an option to deduct these as an itemized deduction on your Schedule A – the difficulty is the expense has to exceed 7.5% of a person’s adjusted gross income before they’re going to get any type of deduction. We’ll just use $300,000 of adjusted gross income as an example. A person’s expenses is exclusive of health insurance premiums. If you’re a business owner, you don’t have to worry too much about being able to deduct your health insurance premiums, it’s the out-of-pocket expenses, co-pays, deductibles, things like that. In order for a person with $300,000 of adjusted gross income to deduct their expenses as an itemized deduction, those expenses would have to exceed $22,500 dollars. If you spent $20,000 dollars out of pocket on medical expenses for the year, you’d just be out of luck. If you spent $30,000 out of pocket, you would be able to deduct $7,500 Again, the excess over that $22,500 floor.
For a lot of folks, the idea of being able to itemize their medical expenses is just never going to happen. A standard piece of advice I dispense to my clients, I don’t ever want to be able to deduct my medical expenses. Because normally the only way that you’re able to do that is if you had a horrible year in regard to your medical expenses, or you didn’t make any money that year. Those are the two most common scenarios of when a person can deduct them. But there are some potential solutions out there.
The first is the health savings account. In 2019, the maximum contribution to HSAs ticked up by $50 and individuals can fund up to $3,500. Families can set aside $7,000. And folks who are over the age of 55 can actually do a catch-up contribution and put aside up to $8,000 now.
The HSA is – I don’t want to call it my favorite – but I think it’s the one that has the most advantages. An HSA account is one of those few occasions in the code where you can put aside money tax-free. And it can grow tax-free because it is an actual account. As long as you’re taking those funds out for qualified medical expenses, you’re able to take disbursements out of that account tax-free. Here’s another advantage. Let’s say you have a family and put $7,000 in your HSA account but you only use $5,000 that year. The $2,000 dollars that remains in the account simply rolls forward to the next year. This is something that over time – and unless you’re maxing out your HSA every year – you’re able to build up inside that account.
Employers can contribute to their employees’ HSA. Now, some employers will do that. The contributions, however, by the employer and the employee, when taken together, can’t go over those limits that we talked about above. Let’s say that you sponsor a plan for your employees, and for married folks you give them $3,000 a year into their HSA at work. If an employee has an additional HSA that he owns himself, absolutely, he certainly can. But again, he can’t go over those contribution limits. If the employer is giving him $3,000, then the maximum that he could fund into that second plan would be $4,000.
Now, the sticking point and the thing that keeps folks away from health savings accounts sometimes is the issue of the type of insurance plan you have to have to be able to qualify for an HSA. The insurance plans are defined as high-deductible plans. What this means is the deductible has to be at least $1,350 for single coverage and at least $2,700 for family coverage. Now, you should be in a position to know how close you have come to meeting your deductible on your health insurance. But this is the type thing that, honestly, you’d be well-served to just call your insurance provider and just ask, “Can I have an HSA with my plan?” If you can, they’ll let you know that. And if you can’t, they may be able to give you some options if you’re interested in doing an HSA.
The other qualifying factor for health savings accounts is the maximum out-of-pocket costs. It’s not enough that we have these deductibles. We also have some maximum out-of-pocket costs that we have to observe. The maximum for single folks would be $6,750 and for a family the maximum out-of-pocket would be $13,500. And just a reminder, out-of-pocket expenses can mean your deductibles, it can mean your co-pays, but it does not include the actual payment that you’re making for your premiums on your health insurance policy. Now, if you’re spending $3,000 to $4,000 out of pocket every year, an HSA may well be a good solution. And assuming everyone’s in good health and you’re not necessarily pegging those out-of-pocket expenses every year, it’s probably going to be a good solution.
The other advantage I’ve already mentioned. If you don’t use all the funds up, they roll forward into the next year. And that can have some advantages if you have some healthcare that might be needed but is not urgent. You can save up for that over two or three years. I think about my four children. They all had to have braces, which is kind of funny because I never had to have braces. So I know where that came from. It wasn’t me. But if you’re looking at braces and you’ve got some time to set money aside, that can ease the pain just a little bit. Or LASIK. Anything like that.
Something I meant to mention at the outset is, regardless of which of these plans that we’re discussing – HSAs, flexible spending accounts, QSEHRAs, or full-blown medical reimbursement plans – the expenses have to be qualified medical expenses. And they have to be medically necessary. Sometimes folks will talk about arrangements like this, and they’ll say, “Well, if you need a little nip/tuck at some point in life, you can pay for that out of your flexible spending account.” That’s not entirely true. Let me contrast two scenarios, one of which would be allowable, the other would not.
Let’s say that that you have sagging eyelids. You’ve reached that stage of life and things are starting to loosen up, maybe just a little bit too much. If those sagging eyelids are interfering with your vision and your ophthalmologist or your physician recommends, “I think it’s called a blepharoplasty.” My first wife worked for a facial plastic surgeon, so I know more of this terminology maybe than I should. But if it’s interfering with your vision, then it would be medically necessary. And the fact that it improves your appearance is just a happy coincidence.
Contrast that with you’ve got sagging eyelids, but they’re not interfering with your vision. In that case, the procedure would be purely cosmetic. Insurance won’t cover it, and neither can any of the reimbursement arrangements that we’re talking about. So just kind of keep that in mind. There’s never carte blanche with these things. It’s always going to have some strings attached. And obviously, it’s in your best interest to stay well within the black letter of these types of arrangements.
The other thing that I get questions about a lot is, “What about over-the-counter medications?” I just got a letter from my insurance provider, Blue Cross Blue Shield here in Florida that had a list of some drugs they were not going to be covering anymore under the insurance. Of course, I checked it. None of mine were on there. But the common thread for all of those drugs was the fact that they’re now available over the counter. Sometimes there’s a little bit of wiggle room there and I’ll give you an example. I have a condition that sounds a lot worse than it is, gastro-esophageal reflux disease or GERD. Practically what that means is I produce a little bit too much acid in my stomach, which is not uncommon for CPAs. So, for almost 20 years now, I have taken a Prilosec every morning. Prilosec, when I started taking it, was a prescription drug and, of course, it was covered by my insurance and would have been covered under any of these arrangements. But then Prilosec went over the counter. Now my doctor writes me a prescription for Prilosec, even though I could get it over the counter. The reason he does that is so that, if I want, I can use my flexible spending card to pay for it. If you have a similar situation, this is something you want to consult with your health care provider about. But normally, medically necessary means that you have to have a doctor’s note, a prescription, something along those lines.
Another question that comes up sometimes is, “What about a pool?” Pools can be medically necessary if you’ve had back surgery or some type of condition where it would help strengthen and improve your condition to regularly swim. Normally what we see are those single-person pools where you swim against the current. Could that be medically necessary? The answer is if the person’s facts and circumstances and in the judgment of their physician it would be a good idea, then absolutely it could be something that would be medically necessary. So, again, you want to consult with your doctor about who is going to obviously know your situation. I had a boss who flipped his Corvette, broke his back, and his orthopedic doctor never wanted him to sleep on anything but a Sealy Posturepedic mattress from that point forward. He put that in writing. So when this gentleman would have to replace his mattress, he would turn it into his insurance and they would actually reimburse him because, in his case of course, it fell under the heading of medical necessity.
So that’s the HSA. This is something that employers certainly can do for their employees. More often than not, though, it’s an arrangement that is part of the health insurance plan that you have or it’s something that you can do for yourself provided your health insurance plan meets those criteria that we discussed.
Another arrangement is a flexible spending account; and flexible spending accounts are a little bit different. The limits are not quite as high as an HSA account and the arrangement is a little bit different. These are funded, at least the money is funded upfront and is fronted by the employer. This is what our company has and so is something I’m very familiar with.
Let’s say that you have 10 employees, and they all elect to do the flexible spending account. That means that the employer would fund the accounts $2,700 for each of the 10 employees. That money has to be available on the first day of the plan year. Now, that’s not really out-of-pocket money for the employer because the way that they are reimbursed for that expense is money is withheld in pre-tax dollars from the employee’s payroll. In essence, the employer, assuming all 10 of those folks are there for the next 12 months, is going to recoup that money that they have to put in upfront. But they do have to fund it upfront, the whole $2,700. They’ve got to have the availability of that the first day of the plan year. And that is the maximum contribution for 2019 is $2,700 per each qualified flexible spending account.
Now, if you have two or more jobs and the employers are not related, you can elect up to $2,700 but that’s the maximum. If you’ve elected $2,000 on one plan and you want to pick up another $700 on the second employer’s plan, that’s perfectly permissible. But again, we can’t go over that limit. There is, though, an exception where we actually can double dip just a little bit. If two spouses both have flexible spending arrangements that are available to them, they can both fund it at either $2,700 or the maximum of their employer’s plan. And, of course, this effectively doubles their numbers. Now, this is what my wife and I do. $2,700 goes into mine and she funds hers as well.
Now, there’s some key differences to keep in mind between HSAs and FSAs. In the case of health savings accounts, you own that account. That is your account. And if you leave that employer, that HSA goes with you. With flexible spending accounts, it’s a little bit different. The employer owns the flexible spending account. If you change employment, that flexible spending account does not travel with you. Whatever funds are in it revert to the employer, and you may actually owe on that last paycheck.
HSA funds, as we mentioned a moment ago, can roll from one year to the next. With an HSA, you can set aside that $7,000. And if you don’t use any of it, it just rolls forward in the next year, and you can put another $7,000 in the next year. With flexible spending account, you’re able to roll forward $500 from one year to the next. But that’s it. So, you have to be a little bit more strategic in planning how you to use that flexible spending account and fund it accordingly, knowing that you’re not ever going to be able to roll over more than $500 from year to year. For those of you with younger children, that is not a problem. For my wife and I, it’s kind of funny. When we got married about three years ago and we had 8 folks on the health plan. If you have 8 people – that was my wife and myself, she has 2 children, and I have 4 children – I was never worried about having any money to rollover from that flexible spending account from one year to the next. That was never a problem. And you don’t have to fund it at the max either. If you’re expecting to spend $1,200 dollars over the course of the year, you can fund it at $1,200. There’s nothing wrong with that.
Another difference is you can actually have a brokerage account for your HSA or a traditional bank account. You can’t do that with flexible spending account. It’s just kind of frozen and that’s what it is. And again, as I mentioned, with a health savings account, the money can grow tax-free within the account. In a flexible spending account, it can’t.
And obviously, there are some differences in the contribution maximums. I mean, even if a husband and wife or two spouses fund a flexible spending arrangement, that’s going to max out at $5,400 per year. The limit for families for an HSA is $7,000. And the flexible spending account does have the “Use it or lose it” rule associated with it. Any funds above $500 that are left in the account at the end of the year revert back to the employer.
And again, depending on your circumstances, a flexible spending account, particularly for a business owner, can make a lot of sense. You’re providing a benefit to your employees and most of them will certainly appreciate that. Apart from the administrative costs associated with the plan, it’s not really costing anything because, again, whatever the employee funds, that’s going to be withheld from their check and you’re going to get that money back over time. The cost of fronting the accounts upfront sometimes can be problematic if you have a large number of employees, but you get that money back over time. So flexible spending account – for somebody who’s spending $5,000 or less – something that would probably meet the needs.
There’s a new – as in the last 2 – 3 years – type of plan: The QSEHRA plan. QSEHRA stands for qualified small employer health reimbursement arrangement and there’s a lot of flexibility with plan. This is a reimbursement plan. You have to show that the money has actually been spent on medical expenses. So again, there’s not carte blanche with this. And the normal way – for all three of these plans – to accomplish this is –I’ll use my flexible spending account as an example. You’ve got a debit card. When you go to the doctor and you pay your copay or you go to the pharmacy and pick up your prescription or you go to the dentist and make your copay, then you just use your card for that account. Just a sidenote: Contact lenses. I cannot get my flexible spending card to work for whatever reason with 1-800 Contacts. So, I will pay for the contacts out of pocket and then as soon as I pay for them, I’ll submit the receipt that they email me to the flexible spending account and then they’ll do a debit into my bank account to reimburse me for those funds.
With the QSEHRA, a couple of rules. As it sounds like, it’s for small employers. Small employer means 50 or fewer employees. Added to this, if you opt to go the QSEHRA route, you cannot offer group health insurance benefits including health insurance, dental insurance, or vision insurance. If you do go this route – and this is a good middle-ground for folks who have a small number of employees as they can’t really be competitive in terms of getting group rates for a group policy, hopefully somewhere down the road Congress will address this and allow people to pool and have large enough groups where smaller employers can be competitive on group insurance –this is a good way to allow people essentially to go out to shop and get their own insurance and you can reimburse them for a portion of that.
If you do offer a QSEHRA, you need to at least offer it to all full-time W-2 employees. This is important and we’re going to come back to this in a moment. With a flexible spending account, the owner can participate as well as their spouse, if they happen to be on the payroll. Health savings account really is at the level of the individual insurance so that’s something that would be worked out there. The QSEHRA, if the owner is considered to be an employee of the business, and their spouse, and then they would be eligible to participate. So again, this is an important point. You have to participate on the same footing as your other employees. You can do a few little carveouts based on age and things like that. For instance, if a person is covered by their spouse’s health insurance plan, you don’t have to offer the QSEHRA to them. If an employee is under the age of 25 on the first day of the plan, you’re not required to offer the QSEHRA. Part-time employees, you don’t have to offer this benefit to them.
Essentially, this is a monthly allowance. And the allowance is the maximum amount of tax-free money the business will pay the employee for healthcare. We’ve got two limits here. For a single individual for 2019, that limit is $5,150. That’s the most you can do. You can do less than that, but that’s the most you can do. And for families, it’s $10,450. Now, again, if you have two spouses who are on the same payroll, you’ve got to stay at that $10,450 limit. Another point, with the flexible spending account, there’s no deduction for the employer funding because, again, they’re getting reimbursed over time. With this, the QSEHRA plan, it is funded only by the employer. And employees can’t contribute to offset the cost of that QSEHRA. So, this is a genuine out-of-pocket expense to the employer. Of course, it’s a deductible expense to the employer as well. And as I mentioned a moment ago, if the owner is an employee, let’s quantify what that means – if you have an S corporation or C corporation, and you’re considered to be an employee – then you’re eligible to participate in this as well.
Now, to my thinking, this might be a good solution for a situation where you have a very limited number of employees. For a lot of my physician clients, my ER docs, surgeons, folks like that, it may just be themselves and their spouse. And, as you know, we like to hire the kids to be on the payroll, but we wouldn’t have to cover the kids because they’re under the age of 25. But in a situation where essentially everyone who’s an employee is a family member, this could really be a viable way to get a deduction inside the business, that again, in all likelihood you’re not going to be able to get at the level of the personal return. Again, this is a good option. It’s something that may have some utility and it’s something that I would encourage it, when we’re doing your annual plan meeting or if you have questions on this, just reach out to your relationship manager we can set up a time to talk about this and see if this is something that would work well for you.
Now, there’s a fourth option. And this is one that some of you who have been clients for a while have been exposed to. A full-blown medical reimbursement plan. This is the one that that there are some difficulties in implementing. First of all, this only applies to C corporations. And most of you are doing business either as sole proprietors, you’re a partner in a partnership or you own an S corporation. You may be the sole owner, or you may have multiple owners. But this is something that’s only available to C corporations. And these are somewhat difficult to structure because, again, if you have a medical reimbursement plan and a C corporation, it’s certainly permissible, but if you have employees inside that C Corporation, then you have to cover all of your employees on exactly the same terms that you cover yourself as the owner. And that can be problematic. Let’s put it this way. You were always on the hook for your own health care expenses. And there’s not really a lot that can be done about that. That’s one thing. Putting yourself on the hook for not only your medical expenses but also your employees’ medical expenses, that can be problematic. So just keep that in the back of your mind.
The other difficulty is – and we’ve always had a workaround for this; the workaround is the management company strategy, or upstreaming is another term that some of you have heard us talk about, where we up a separate C corporation. Let’s say that your main business, for the sake of illustration, it’s an S corporation. We would set up a second company, a C corporation, and the C Corporation would provide services to the main company. But this is where we get into the difficulty. The ownership of the C Corporation cannot be identical to the ownership of the S corporation. Dr. Jones can’t own his medical practice and then also own his management company. The reason for that is the attribution rules. Now, I’m not going to get into the high wage of the attribution rules. But essentially, when there’s common ownership of two businesses, they have to offer virtually identical employee benefit plans. So if the same individual owned both entities, they would have to offer medical reimbursement plans not just in the C Corporation, but also in the S corporation. You can work around that in certain circumstances, but I’m going to give you a quick list of who can’t do upstreaming. Obviously, we’ve touched on one, you can’t have the same person owning both corporations. You can’t have parents and children set up in this arrangement because, again, their ownership interests in one another’s business are attributed to one another. Same with grandparents and grandchildren, same thing with siblings. There’s one exception to the attribution rules and that is, if two spouses own – and that’s really the only folks who can upstream are spouses – completely separate businesses and they are not officers, shareholders or fiduciaries for one another’s businesses, then, assuming one of the entities is a C corporation, you can have a medical reimbursement plan there that you may not want to have in the main business. And we’ve actually used this.
Now, there’s some limited utility here because for a person who’s got $3,000 of out-of-pocket medical expenses at 37%, that’s going to knock, using math, about $1,200 off their tax bill if we upstream into a management company. But again, by the time we set up the entity, by the time we get separate tax returns done for that entity, by the time we have a separate accounting fee for that entity, and we have to fund payroll in that other business as well because obviously, you can’t give employee benefits unless you have some employees or at least one, many times that tax savings from being able to write the medical expenses off can be completely eaten up just in the administrative expenses of having this separate corporation. This is a good solution though for folks who have ongoing high medical expenses. And that’s normally associated with having a situation where one of the spouses or perhaps a child has a chronic physical issue. Perhaps they’re a special needs child. And we know we’re going to have $30,000, $40,000 dollars in medical expenses year in and year out. In this circumstance, this is still something that is absolutely a viable solution, provided we can have a legitimate business purpose for that management company. It has to actually perform management services for the main business. This can’t be smoke and mirrors. If a person’s medical expenses are in the range where an HSA or a flexible spending account will take care of those, those are much simpler ways to do this with much less in terms of associated costs to pull those off.
“An HSA is an account that you set up at the bank. Is the QSEHRA also something that you set up through a bank?”
With the QSEHRA, you’re not required to set up a separate account. And so you could actually do the reimbursements on a QSEHRA plan out of your main checking account for the business if you’d like to. Or, if it’s easier to track things by setting up a separate account, you can certainly do that, but it’s not required. And, unlike the HSA, the funds can’t grow inside that account in a tax-free way because, remember, that actually belongs to the business. It doesn’t belong to the individual employee. It’s just a benefit that’s being provided, a reimbursement that’s being made.
I would not try to internally run a QSEHRA plan. There are third-party administrators out there for those top plans and I would definitely let somebody else run the plan because it could potentially be problematic for the employer since the employee has to actually turn in receipts and things like that because it’s a reimbursement arrangement. So just the accounting for it could kind of be a hassle.
“I’ve had luck keeping track of the QSEHRA plan myself for the third year we’re in it now. And I’ve done it all on a spreadsheet. It isn’t too terribly bad. There are some regulatory qualifications because you’re taking medical records as receipts. You have to be careful how you’re handling information. And there’re some compliance things in terms of reporting to employers about what the next year plan is. You’ve got to publish this stuff to all employees prior to the marketplace, them being able to choose their own healthcare and things like that. So there’s just some extra modifications you need to do. So I have a third party set up, and then we are maintaining it in-house. And if an employee chooses not to get involved in the marketplace and purchase insurance, they can’t be reimbursed.”
That’s right. Exactly. You can’t do this just for medical expenses. Employees have to actually get insurance. Although if you choose to allow folks who are covered by their spouse’s insurance, you have that option. If their spouse – and this is so, so rare – if their spouse is not paying those insurance premiums in pre-tax dollars through a cafeteria plan or Section 125 plan, you can do that. But, yeah, I would probably think 10 employees would probably be about all you want to handle in-house. If you have 40 employees who are participating, that could really be very time-consuming. A little job all on its own.
“Right. And now I’m running into some things because we’ve got more people. It used to be a bunch of single guys, and now it’s more people that are married. And while it was okay early on, I do feel like I’m probably going to move towards a third-party handling it because I don’t want to force knowing their medical information if I don’t need to. Because I am an employer, it’s a little bit of a weird feeling that I’m in that position, even though, for the most part, I put an office manager on that specific task. Eventually, it gets, not really cumbersome if you’re good at spreadsheets and you make a system for doing it, but the compliance is certainly easier with a third-party. And if you have a third-party doing it, like you had previously said, they could have a debit card that tracks it and links it to their payroll.”
Right. And you bring up a good point. There’s a fine line between knowing your employees and knowing too much about your employees. And when you start to get into their healthcare, that might be a line that would be better left uncrossed, to be honest.
If you have questions about what kind of healthcare benefit and reimbursement plan is right for your business, call us at (772) 257-7888.