Last modified: 11/17/20
Health Reimbursement Arrangement (HRA) is a benefit that some employers offer their employees to help with healthcare expenses. As an owner of an S Corp with 1 employee, you too can offer this benefit. The money in it pays for expenses like medical, pharmacy, dental, and vision. You don’t pay taxes on money that comes from an HRA.
We've put together frequently asked questions on how to set up an HRA.
- What is an HRA?
- Is there a limit?
- Why should I set up a HRA?
- How do I set up my HRA?
- What is an “eligible expense” under the HRA
- When is this plan effective? How far back can I deduct expenses?
- How do I pay for the qualified medical expenses?
- How are my reimbursements going to be reported in payroll?
- How do I change the reimbursements in Gusto since my medical expense changes month to month?
- How are my reimbursements going to be recorded in QuickBooks?
- Why are we running HRA through payroll?
What is a Health Reimbursement Arrangement (HRA)?
- An HRA is a plan set up by an employer to cover medical expenses for its employees. As an S corp employer, you decide how much you will put into the plan. As an employee, you can request reimbursement for actual medical expenses incurred up to that amount.
- HRA can only reimburse medical care expenses incurred by employees, their spouses, and dependents.
Is there a limit?
- There is no limit on the amount of money you, the employer, can contribute to the accounts. You decide what the limit is.
Why should I set up a Health Reimbursement Arrangement (HRA)?
- Short answer: Tax savings!
- The S corp pays for qualified medical and dental expenses for you, your spouse, and your dependents. You don’t pay federal income tax or employment taxes on amounts your employer contributes to the HRA.
How do I set up my HRA?
- To take advantage of the benefits, you will set up an HRA for your company. We have provided a sample plan that you can use. Bethany (our Head of Member Services) used Hyke as the example company and herself as the example officer. Simply replace it with your own company name and EIN (the line for EIN is blank), and be sure to sign the first page of the first section (resolution) and then retain a copy for your business records.
- You will need to create one for every year
What is an “eligible expense” under the HRA
Schedule A of the HRA Plan lists the ALL medical expenses that are reimbursable. For example:
- individual health insurance premium
- premiums for dental and vision insurance
- prescription drugs or medicines
- dental treatments
- annual physical exam
- prenatal care, postnatal treatments
- care from a psychologist or psychiatrist
- transportation costs incurred to get medical care, and much more.
Schedule B of the HRA Plan lists the expenses that are NOT reimbursable.
When is this plan effective? How far back can I deduct expenses?
- You can go back to the start of their business or 1/1 of this year, whichever is later. If you set up your HRA and would like to claim previous expenses, sum up all your medical expenses and run in through Gusto one time.
How do I pay for the qualified medical expenses?
- Use your personal credit card or bank account to charge these expenses
How are my reimbursements going to be reported in payroll?
You’ll run the reimbursements through Gusto
- Click the People tab.
- Click the employee name.
- Go to Job & Pay tab.
- Scroll to the bottom and click Add Recurring Reimbursement.
- Select a reimbursement type from the drop-down: Health Reimbursement Arrangement
- Enter the reimbursement amount that will be added on each regular payroll.
- Click Save.
The reimbursed amount will show up on your W-2 as non-taxable compensation.
How do I change the reimbursements in Gusto since my medical expense changes month to month?
- You can manually change the reimbursement amount in Gusto
How will my reimbursements be recorded in QuickBooks?
- You will create a new expense account Employee Reimbursement in QBO, and categorize your qualified medical expenses using this account.
Why are we running through payroll?
- You will run all the cost of your coverage (your medical expenses) in payroll for tax reporting purposes. Gusto will report it in Box 12 of Form W-2 using code DD.
Questions? Reach out to your Collective team in Slack 😄