Choice Stories

May 13, 2021

5 Tax Benefits of Offering Small Business Health Insurance

Beyond helping your business attract and retain top employees, offering health insurance to your staff offers other advantages, including tax benefits.

Here’s a look at four of the tax benefits of offering health insurance.

Tax Deductibility

Generally, employers are able to deduct 100% of the cost of premiums paid for health insurance for employees and/or their dependents from both their business’s federal and state income taxes.

Reduced Payroll Taxes

Offering a Section 125/Premium Only Plan (POP) to your employees can reduce your payroll taxes and give them the ability to fund their portion of their health insurance premiums on a pre-tax basis. Their portion of your group health plan premium may be less than comparable individual health coverage they could purchase on their own.

A POP also allows employees with a High Deductible Health Plan (HDHP) to reduce their taxes by the amounts contributed to Health Savings Accounts (HSAs). The combination can yield a total payroll deduction of 25% to 40%.

Employers can also usually deduct HSA contributions (on behalf of employees) from their small business’s taxes.

Some business owners may find offering Health Reimbursement Arrangements (HRAs) a more flexible option. Instead of funding a group health plan, the employer sets aside funds to reimburse employees, tax free, for plans they purchase on the individual market. Your HRA contributions are tax deductible for your business and Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) payroll taxes do not apply. For employees, HRA reimbursements are excluded from their gross income and are 100% tax-free.

According to reporting by the U.S. Chamber of Commerce, Qualified Small Employer HRAs (QSEHRAs) are gaining traction because they offer employers cost control, while giving employees more choices. Additional information on QSEHRAs is available at HealthCare.gov.

ACA Tax Credits

Depending on your group size, your business could be eligible for small business health insurance through the Covered California state exchange, which is part of the federal marketplace exchange program established by the Affordable Care Act (ACA).

The Covered California for Small Business exchange offers health insurance to employers if:

  • The business has no more than 100 eligible employees
  • Certain contribution and participation requirements are met
  • At least one employee receives a W-2
  • The majority of employees live in California

If you are a sole proprietor with no employees receiving a W-2, you are not eligible for coverage through Covered California for Small Business; however, you could be eligible for individual coverage through the state exchange. More information is available here.

The tax credit available through Covered California for Small Business works on a sliding scale. If your business is small or you employ workers with a lower annual average wage, your tax credit is likely to be higher.

50% Premium Tax Credit Max: If you are a for-profit employer, the maximum tax credit available through Covered California is 50% of your premium expense for employees’ coverage. For non-profit/tax-exempt employers, the maximum tax credit is 35%. The tax credit applies to two consecutive tax years, and is only available for coverage purchased through Covered California.

In contrast, as previously mentioned, employers are generally able to deduct 100% of the cost of premiums paid for employees’ health insurance on both their business’s federal and state income taxes, if they purchase coverage through an insurer or the CaliforniaChoice private health exchange marketplace.

Tax Credit Considerations: Several factors influence your possible ACA tax credit, including the number of employee, average employee wages, and your contribution toward the cost of coverage for your employees. To be considered for a tax credit, you must have 25 or fewer full-time equivalent employees. (Owners and family members are not counted when calculating your tax credit.) You must contribute a minimum of 50% to the premium for employee coverage. For additional information, refer to the Tax Credits page of the Covered California website.

Potential Added Tax Savings

Offering paid medical leave to employees could also provide you with a tax credit ranging from 12.5 to 25 percent. Under the Consolidated Appropriations Act of 2021, employers offering medical leave that meets certain requirements can take a general business tax credit through 2025. It applies to family and medical leave of up to 12 weeks per taxable year. More details are available on the Mercer website.

Employees Appreciate Benefits

Year after year, employee surveys have found that workers value health insurance, and they appreciate when it’s offered through their employer. In fact, according to a survey by Glassdoor, more than half of employees (57%) say benefits and perks are a key factor in deciding whether to pursue a particular job. MetLife’s 19th Annual U.S. Employee Benefit Trends Study released in 2021 found 85% of employees put health insurance at the top of their “must have” benefits list.  

While offering benefits may appear a stretch for your company budget, it’s important to consider the potential cost of employee turnover, as top-performing employees exit to join an employer that offers benefits. Replacing an employee can cost 20% of the employee’s salary, according to the website, Clutch.co.

Ready to Compare Plans?

If you want to shop employee benefits available to your business – including all of the coverage options available through a private health exchange – a good place to start is to talk with a broker. The services of a broker are typically available at no cost, and consulting a broker can save you money.

A local broker will know your marketplace, the coverage options in your area, health care providers in each health plan’s network, and value-added benefits that may be available. If you don’t already have a broker, we can help you find one here.

Your Beginner's Guide to Choosing a Small Business Employee Benefits Program

Do you need help choosing the right health benefits for your employees?
This guide can help!