Five practical steps in setting up a Tax Free Small Business Section 139 Qualified Disaster Relief Payment Program

A Small Business Section 139 Qualified Disaster Relief Payment Program can be used to get tax free payments to employees without the burden of income taxes, social security and wage taxes, and other expenses. This post entirely skips the explanation, legal background and strategy and jumps right into the practical steps in setting up a tax free benefit plan plan within a small business employer.

1) Use a written plan document. This is not a legal requirement but just a good business practice.

2) Use a third party administrator. It’s creepy and inappropriate for the employer to ask about employee personal expenses. Yet the IRS wants appropriate verification. An outside benefits administrator is best.

3) Piggyback off the payroll system. Even though this is not taxed as payroll, we can use the same financial infrastructure to make the payments and keep records.

4) Communication is key. Since employees are not at work, email and text message announcements are the key, combined with live real time support professional to answer employee questions.

5) K.I.S.S. – Act sooner rather than later. Employees and firm owners face growing stress daily. An independent small business benefits firm like Freedom Benefits can launch this plan in just a day. Keeping a simple approach will also keep administrative costs to a minimum. When designed as proposed and combined with the payroll service, this plan should only cost a few dollars per employee per month.

If you have questions, please reach out to @tonynovak, by phone (856) 265-0306, or email tnovak@freedombenefits.org for a free no-obligation discussion of this plan for your business.

attorney tax

Good news for small business HRAs

Recently released industry data shows that qualified small employer HRAs fared well in their first year of operation under liberalized tax laws. The new plans are called “Qualified Small Employer Health Reimbursement Arrangements” or “QSEHRAs”. It appears that HRAs enable small businesses to effectively compete with larger businesses offering group health insurance. Additionally, it appears that smallest firms with 1 to 4 employees have used HRAs most effectively to complete favorably with larger firms that offer group health insurance.

  1. The maximum legal allowance increased slightly for HRAs for 2020 to $5,250 for individuals, $10,600 for families. One of the primary benefits of HRAs is that they allow employers to control their costs. Most employers that offer HRAs, especially those with more than 4 employees, offer benefits less than this amount in their HRAs (see #3 below).
  2. Less than 1 in 5 employees eligible for HRA benefits use their annual total maximum allowance. This is important because it shows that for most employees, the HRA offers full coverage despite its limits on maximum benefits.
  3. In 2019, the average maximum allowance for benefits is amounts for single employees was $280/month (81% of the legally allowable maximum benefit) and $514/month for employees with a family (59% of the legally allowable maximum benefit).
  4. Despite insurance costs increasing, claims to HRAs decreased over the past year. Since there is some evidence that
  5. Employees participating in a HRA submit an average of 12 claims per year.
  6. The six most common non-premium reimbursements employees submitted include: insurance premiums (typically either 100% or 0% of employees depending on plan design), prescription drugs (55% of employees), medical office visits (45% of employees), chiropractic care, dental care and mental health counseling.
  7. The smaller the company, the higher the average monthly allowance. This may reflect nepotism is small firms. For example, some HRAs are set up to cover the spouse as the only employee.
  8. HRA allowances mirror the cost of health insurance. The states with the highest average health insurance premiums typically have higher HRA plan allowances to cover the higher premiums. Examples are Connecticut, Rhode Island, and North Dakota. Conversely, the states with lover average insurance premiums tend to have lower HRA allowances. Examples are Nebraska, Arkansas and New Hampshire. Increases in HRA allowances correlate with increases in health insurance premiums.

Taken collectively this dats provides evidence that HRAs are working for small businesses, are saving money, . I offer several types of HRA plans at no additional charge to small business accounting clients. For more information, see www.FreedomBenefits.org.

One sheet summary of Freedom Benefits

Yesterday an inspiring business adviser Sara Rosenberg of Powermatch, wrote a social media post that said that every business should have a one page summary that answers four questions:

  1. The problem you solve
  2. A very brief description of your process
  3. How you are different than everyone else that does what you do
  4. The results that happen when someone hires you

This is a powerful idea but one that I have not ever considered, So I spent some time and came up with this document that flows exactly in the 4 part format she suggests.

Update: This post was originally published in January 2018 and is now updated for 2020. The 2020 version expanded to two 8 1/2″ x 11″ pages of formatted print so I’m calling it a “one sheet summary”.

Here is the draft of the one sheet summary:

freedom benefits page 2020

Setting Every Community Up for Retirement (SECURE) Act: First Impression

“The SECURE Act was passed into law yesterday. Many features benefit the financial services industry. Some features potentially benefit small businesses, but affirmative action is required to take advantage”.

– Tony Novak CPA

Forbes retirement planning reporter Elizabeth Bauer wrote: “passage of the SECURE Act is great. But the process by which this occurred is appalling”. I certainly agree. This is no way to pass legislation that affects so many. The law is good for the financial services industry, but is it good for workers? The answer, of course, lies in whether employers elect to use the new provisions of the law. Since retirement plans are still purely voluntary for most employers, no retirement plan legislation is effective without a voluntary choice to participate.

Under the range of retirement planning changes under SECURE, a tax-free 529 college savings plan distributions can be used to pay for registered apprenticeship programs and up to $10,000 in student loan payments. The law also includes provisions to expand the eligibility of 401(k)s to include part-time workers that complete between 500 and 1,000 hours of service for multiple years, and to increase the age for required minimum distributions from age 70 1/2 to age 72 in 2020. Small employers may group together to offer 401(k)s.

The real bottleneck in small business retirement plans is lack of easy access to personal local professional service. We know that not all business support can be delivered effectively through a remote call center. On site support and an understanding of the business really helps. Under the current system employers complain that service outside of core investment management is lacking. Employees say that retirement plans are not their top priority, and they have a range of intersecting questions about taxes, banking and cash flow. They simply do not have access to the resources required – financial and otherwise – in order to make a commitment to retirement savings.

Freedom Benefits addresses this issue by offering small business employees direct access to professional help on demand, at short notice and in small increments, as an employee benefit without the worry of the cost of this support. We find that this type of financial help is far more valuable than other types of employee benefits to many employees.

Small business employers who set up a successful retirement plan for the first time may be eligible for a $500 tax credit. Call or email to plan an initial conversation about retirement plan incentives that will work best for your firm.

Tax-free employee benefits

One of the primary goals of small business employee benefit plans is to provide tax-free compensation to employees.

Employer-provided employee benefits are generally taxable in the same way as regular wages. There are exceptions, however, that allow tax-free treatment. Freedom Benefits focuses on allowing employers to maximize those nontaxable benefits that are selected by individual employees. The savings can add up to thousands of dollars in tax savings to both the employer and each individual employee.

Nontaxable benefits include:

Accident and health benefits.
Achievement awards.
Adoption assistance.
Athletic facilities.
De minimis (minimal) benefits.
Dependent care assistance.
Educational assistance.
Employee discounts.
Employee stock options.
Employer-provided cell phones.
Group-term life insurance coverage.
Health savings accounts (HSAs).
Lodging on your business premises.
Meals.
No-additional-cost services.
Retirement planning services.
Transportation (commuting) benefits.
Tuition reduction.
Working condition benefits

Employers  must meet other additional administrative requirements to keep each of these listed benefits free of federal income taxes1 to employees. That’s where Freedom Benefits come in. These benefits are tax-deductible by the employer and not taxable to the employee when provided under a Freedom Benefits small business employee benefit plan.

Employee contributions

Employees typically elect to receive compensation in the form of tax-free benefits instead of cash compensation,

Employer contributions

We generally recommend that employers allocate a minimum of 2% of total payroll of eligible employees to this type of employee benefit plan. When this funding requirement is met, the employer meets the requirements for non-discriminatory benefits. when this amount is allocated to benefits provided by us then no additional fees are charged by Freedom Benefits 2.

Ask for a proposal on the tax savings that can be offered to your firm’s employees.

 


1 In some cases the taxation under state laws varies from the federal tax treatment. Freedom Benefits does not provide tax advice except when included as part of a separate payroll services agreement or other tax services agreement.
2 Freedom Benefits charges a $300 initial consultation and proposal fee that is applied to the amount of available employer-paid benefits if the plan is started with the proposed amount of employer funding.

16 popular employee benefits for small businesses

A Freedom Benefits small business Consumer Driven Employee Benefit Plan can include these 16 benefits:

1) Group Health Insurance

2) Health Savings Account (HSA)

3) PPO Discount Pricing Service (PPO)

4) Health Reimbursement Arrangement (HRA)

5) Special Purpose Health Reimbursement Arrangement (SPHRA)

6) Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

7) Flexible Spending Account (FSA) including Dependent Care Plan

8) 401(k) Plan

9) Pension Plan

10) IRA or SEP Retirement Savings Plan

11) Deferred Compensation Plan

12) Thrift Savings Plan

13) Employee Home Office Expense Reimbursement Plan

14) Employee Travel Expenses Reimbursement Plan

15) Employee Work-Related Expense Reimbursement Plan

16) Other benefits specified by the employer

For a free copy of Freedom Benefits small business employee bnenfits Summary Plan Description, call or write us.

Small Business Employee Benefits Made Easy!

Small business employee benefits are managed much more effectively when the business owner has a basic working knowledge of the components that make the plan successful. This bog post lists those basic components.

  1. Understand the purpose of the employee benefit plan – Usually the goal, at least the starting point goal, is to provide benefits that are tax-deductible as a business expense and tax-free to the employee. If not for this tax advantage, there would be little incentive for employers to be involved. Each employer has a unique and specific goal and so the employee benefit plan is designed to match that goal.
  2. Understand what is not the purpose of an employee benefit plan – No longer do employers provide a ‘one size fits all’ and ‘take it or leave it’ benefit plan design. Today’s employee benefits are designed to extract and maximize the benefits and efficiencies of consumer-driven choices.
  3. Communication – Good communication is the key to a successful employee benefit plan. All of the stakeholders – the employer, employees, spouses and dependents of employees, plan administrator, claim administrator, insurer, and payroll company must feel comfortable that they have a reliable source of information. A reputable benefit plan adviser makes all the difference.
  4. Documentation – Employer resolutions, Enrollment forms, Plan Documents and summary plan Descriptions are typically required. A non-attorney typically provides these sample documents but cannot provide legal advice. The employer is encouraged to seek independent legal advice on all business documents.
  5. Claim accounting – Nowadays this is typically handled via secure portal, email or text message, at the option of the employee. The result is an approved claim report that is sent to payroll processing.
  6. Payroll processing – Most employee benefit transactions between the employer and the employe are handled through a payroll processing service. Once the benefits accounts are set up properly within the payroll system, this process usually flows smoothly. Typically the payroll processor sends reports back to the employer for general accounting purposes.
  7. Tax filings – some employee benefit plans require year-end filings either singularly or as a data inclusion on another form like a W2. Again, this process flows effortlessly within a properly set up payroll and benefits administration system.

Freedom Benefits is prepared to make all the details flow effortlessly. Just give a call to discuss your own small business employee benefit plan. 

Insurance for small businesses

Q: Do you offer plans for small business? We are a small business of 3 people. Or can they purchase health insurance through you individually?

A: All of these plans shown in links related to Freedom Benefits are available to small businesses on a list bill basis. The easiest thing is to allow individuals to enroll without entering payment data and then ask us to set up the list bill.

If the business plans to pay for Obamacare-type individual insurance then an additional step is required to set up a Qualified Small Employer Health Reimbursement Arrangement.

Small group major medical coverage may also be available however these are traditionally not purchased through online enrollment services. A local representative may be the best bet.

“One-employee QSEHRA”: a contradiction in terms

Note: More recent guidance issued in 2018 and 2019 supersedes this blog post.

The issue of health benefit payments for small businesses became a lot more complicated after implementation of the Affordable Care Act. After all, the law was designed to enforce rigid compliance with health care policy and do away with the liberally designed health plans that varied from one small employer to the next. Since late 2016 we’ve had a range of legislative and administrative actions to undo the harsh effect of the original law. Now we are left with a complicated hodge-podge of rules that can confuse just about anyone.

QSEHRAs are a new type of HRA implemented in 2017 that are specifically designed for an employer with a health plan covering two or more employees since plans covering only one employee are not subject to the reforms and restrictions that the QSEHRA is designed to address. The QSEHRA adds an additional layer of regulation and restrictions to allow an employer to help pay for individual insurance, something that is already always allowed in a one employee health plan,  In short, employers with a one employee health plan have no need for a QSEHRA.

The issue came up today among accountants when the bookkeeper of a small business said that the employer could reimburse only $10,0001 of the health insurance cost of an employee. The bookkeeper was likely referring to the strict excise tax penalties imposed by 4980 of the Internal Revenue Code and the limits of the workaround. Notwithstanding the effect of any administrative action designed to weaken and diminish the impact of these employer penalties, The IRS has already determined that these restrictions and penalties do not apply to one employee health plans2. In this case the use of a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) 3 is completely unnecessary and only serves to complicate the discussion.

My point is simply this: the QSEHRA was designed to help small employers mitigate the impact of ACA market reforms on small group plans – specifically those related to an employer penalty for paying for individual insurance. Those restrictions do not exist for one employee health plans. So any attempt to use a tool (QSEHRA) to mitigate the effect of the ACA is simply not necessary and only serves to create unnecessary complications and confusion.

While there is no authority specifically prohibiting the use of a use of a QSEHRA in a one employee plan, its use could be viewed by the Service or the courts, if applicable, as an error, in the event that QSEHRA failed to meet the more strict requirements then it seems likely that the plan might still qualifiy as a tradidtional HRA. For example, an employer with a one employee health plan that provided dental benefits would fail to meet the QSEHRA requirements but would still meet the requirements for a traditional HRA.

The conclusion is simple: Don’t use a QSEHRA in one person health plans where a traditional HRA will suffice.


1 The QSEHRA maximum for family coverage is actually $10,250 for 2018.

2 IRS Notice 2015-17: Guidance on the Application of Code § 4980D to Certain Types of Health Coverage Reimbursement Arrangements

3 IRS Notice 2017-67: Qualified Small Employer Health Reimbursement Arrangements

Caution about ‘skinny’ health plans

NBC News published a detailed investigative report on “skinny health plans” this past week. Their conclusion is that consumers are confused about health insurance and that the Trump administration is adding to the confusion. As a guy who has handled more than 50,000 consumer communications about health insurance over many years, I agree with the published report’s analysis and conclusion. Yet this this consumer confusion existed back in the years before the Affordable Care Act so we can’t blame it all on Trump just because he has pushed the ‘skinny’ health insurance approach by executive order.

I tend to react furiously to false advertisement claims by health insurance marketers, often untrained telephone sales boiler rooms that notoriously mislead consumers. Recent claims that insurance plans are “ACA compliant” or “promoted by President Trump” are the most confusing to consumers lately.

Yet these alternate health plans do have their place in the market. Whether we call them “skinny health plans”, “short term medical insurance”, “limited benefit health insurance” or “core health insurance”, my position has always been that some coverage is better than none at all.

Most people who pay for their own insurance are not adequately covered by any single health insurance  plan, including the ACA health insurance policies. Whether an ACA plan or another plan works better for a normally healthy person is a function of the type of medical bills they will incur in the future; something we can seldom predict in advance.

In a perfect world, we would be covered by a government-influenced basic coverage and a supplemental policy through our employer or purchased individually. Although we are far from a perfect world, Freedom Benefits can help small business employers redesign their health plans to maximize the benefits to employees that are offered through a combination of public and private health plans.