HSAs

Submitted by Jason Hochstadt on Sun, 2017-11-26 13:30

Hello,

Client is the sole owner of an S. Corp (service business). Client maintains an HSA which she fully funds from after-tax savings. No Sect. 125 cafeteria plan is in place for the business. Only 1 other employee is insured thru the group medical plan – and she has an EPO (not HSA). 2 other full-time employees waive out for spousal coverage.

Questions:

1. Can the owner establish a Sect. 125 cafeteria plan AND, as a result, make pre-tax contributions into her HSA which would also avoid self-employment (SS and Medicare taxes)? Is this possible even if the only other insured employee is enrolled in an EPO (old HMO) and, as a result, no contributions are being provided?

What are the requirements for offering a Sect. 125 cafeteria plan in general?

2. Per an Ed Slott IRA Update from the past, I want to confirm that, in the event a child (non-spouse beneficiary) inherits the Client’s HSA, the child may reimburse for up to 1 year AFTER the client’s death any and all medical expenses ever incurred assuming receipts are maintained. These would be considered qualified medical withdrawals. Would they be reported solely on the client’s final year income tax return as itemized deductions? Or, would they also be reported on a Federal (and State if applicable) estate tax return?

Thank you.

Jason



Submitted by David Mertz on Sun, 2017-11-26 16:26

Regarding #2, any distributions paid from the HSA to the non-spouse beneficiary after the client’s death are reportable on the non-spouse beneficiary’s tax return and any expenses that qualify reduce the amount of those distributions that is taxable on the non-spouse beneficiary’s tax return.  The medical expenses cannot be reported on any tax return as an itemized deduction, otherwise they cease to be qualified medical expenses for the purpose of an HSA distribution.

Submitted by William Tuttle on Mon, 2017-11-27 14:34

  • A 2% S-Corp shareholder-employee can not participate in a Section 125 or 105 plan even if they have one for their business.
  • However, a 2% shareholder-employee can either have the S-Corp pay healthcare insurance premiums or the shareholder-employee can pay the premiums and be reimbursed by the S-Corp and have the S-Corp make employer HSA contributions. This can all be accomplished with the following shell game to make these FICA exempt:
  • The S-Corp takes a deduction for the healthcare insurance and HSA employer contributions included as officer compensation.
  • As compensation they are reported on the shareholder-employee’s W2 Box 1 Wages, but not Box 3 Medicare Wage and Box 5 Social Seecurity Wages.
  • These amounts should not be subject to FICA on payroll.
  • If you are using online or software based payroll, it may be a littlle tricky to get the HSA contributions handled correctly for payroll and the W-2. Note: The HSA contribution should be reeported in W-2 Box 14 not Box 12.
  • You then claim the Self-Employed Health Insurance Deduction on Line 29 and the HSA deduction on Line 25 of your Form 1040.
  • Note: I am just giving you the mechanics about how it is done for an S-Corp 2% shareholder employee with no other employees. I do not know if there are any comparability issues if you are making the full HSA contribution for just yourself. This sounds like a question for an employee benefits professional.

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