HRA 105 Question

[TaxBird]

I have an S-Corp client who has a Section 105 Health Reimbursement Arrangement.

In 2006, the client paid herself what amounted to her salary plus the HRA amount. The HRA amount was properly included in gross wages but excluded from FICA.

Does anyone see anything procedurally wrong with this? The company that administers her plan is telling her that it was done incorrectly for 2006; that the HRA amount should have been deducted from the salary not given in addition to the salary.

Does anyone know if there is such a restriction on a HRA 105 plan? Is it procedurally incorrect to add the reimbursement?

The example the administrator provides shows John Doe before & after:
Before: Gross Wages = Salary of $36K
After: Gross Wages = Salary of $27K plus HRA 105 of $9K

My client (2006):
Currently: Gross Wages = $43K: 40K of Comp and $3K of HRA 105
As proposed by HRA 105 Admin: Gross Wages of $40K which is comprised of $37K Comp/$3K HRA 105

The HRA 105 Admin is indicating that 941c & W2/W3c need to be prepared and the 'Excess FICA' refunded to the employee. I don't know that all that is necessary.

In either scenario, the TP & S is still saving only ~$250ea. Therefore, I think mine is an equally correct position (barring any procedural type restriction). However, I acknowledge that there maybe something in the distiction between the two that I'm missing.

Hopefully, someone here is familiar enough with 105 HRA's to help me out in my thinking of this.

Any assistance would be greatly appreciated.

[RLymanC]

Hra

I found this site that may help.

http://nwhin.com/section105_information.htm

Not sure if it's OK to post links????

[taxonomy]

Hra

Is HRA through shareholder's spouse, or can an s corp sh/ee have an HRA now? Anyway, not wages and not subject to FICA..

[TaxBird]

I found this site that may help.

http://nwhin.com/section105_information.htm

Not sure if it's OK to post links????

I'll check this out.

Thank you.

[Bill Tubbs]

My understanding...

was that a Sec 105 plan is good for employees, especially when the employee covered by the plan is the owner's spouse!

I thought Sec 105 reimbursements were:
1) non-taxable income in addition to wages
2) for a >2% S-Corp shareholder were a taxable fringe benefit

Bill

[TaxBird]

was that a Sec 105 plan is good for employees, especially when the employee covered by the plan is the owner's spouse!

I thought Sec 105 reimbursements were:
1) non-taxable income in addition to wages
2) for a >2% S-Corp shareholder were a taxable fringe benefit

Bill

For the owner, they get a break on the FICA for amounts paid for health insurance premiums. By running it through an HRA plan, the owner preserves the deduction on the 1040.

Since posting I have concluded that the HRA people weren't distinguishing between employees and >2% owners. So, the way it was carried on my clients' books was correct for a >2% owner. In my original post I was assuming that they had made the distinction and were still pressing their point.

Thanks to all who responded.