Understanding Group Health Benefits and Tax Deductibility
If you are considering Group Health Insurance for your employees, and you don’t offer insurance right now, you may not be aware that Health Insurance premiums for your employees are deductible on your company’s federal income taxes. There are other tax benefits to small business health insurance, too. Read on to learn more.
Premium Tax Deduction
In general, the premiums you pay for your employees’ health insurance (and their dependents, if you contribute to those premiums, too) are 100% deductible as an ordinary business expense. That applies to your business’s federal income taxes as well as your state income taxes.
If you are a sole proprietor, a partner in a partnership, part of a Limited Liability Company, or a shareholder with two percent or more of stock in an S corporation, you should consult with a tax advisor concerning the potential deductibility of health insurance premiums on your taxes.
Reduced Payroll Taxes
Your tax savings do not end with your premium contributions, though. If you offer your employees a Section 125/Premium Only Plan (POP), you can reduce your payroll taxes, while giving employees the ability to fund their premium contributions with pre-tax money. That means they could spend less on their health coverage than what they might pay when buying comparable health coverage on their own in the individual health insurance marketplace.
If your employees are enrolled in a High Deductible Health Plan (HDHP), when they take part in your POP, they can reduce their taxes further by contributing to a qualified Health Savings Account (HSA). The combination of an HDHP and POP can yield a total payroll deduction in the range of 25% to 40%.
If you contribute to your employees’ HSAs, you can also deduct those payments from your small business taxes at the state and federal level.
Option for HRAs
Some businesses may choose to offer Health Reimbursement Arrangements (HRAs) to workers as an alternative. Instead of funding a Group Health plan, you put aside funds to reimburse employees for the plans they purchase on their own. Your HRA contributions are tax deductible and your employees’ reimbursements are excluded from their gross income and are 100% tax-free. Your HRA contributions also reduce your FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) payroll taxes.
Another option for small employers not offering Group Health coverage is to provide employee help through a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). A QSEHRA allows employers with fewer than 50 employees to provide non-taxed reimbursement of certain health care expenses. Eligible expenses include health insurance premiums and coinsurance amounts if an employee purchases minimum essential coverage (including coverage purchased in the Individual Marketplace like the public exchange Covered California).
With a QSEHRA, the employer selects the amount contributed to employees’ health care costs, up to the annual maximum set by the IRS. For the 2022 tax year, small businesses can contribute up to $5,450 for self-only employee coverage ($454.16 per month) or $11,050 for family coverage ($920.83 per month).
Employees pay their health care provider or insurance company, and then submit proof of payment to be reimbursed by the QSEHRA. If an employee does not submit a claim, the employer keeps the money, though an employer may roll it over from year to year for as long as the employee is still employed by the business.
Added Potential Tax Savings
Offering paid sick leave to employees can give your business still another tax credit under provisions in the Consolidated Appropriations Act of 2021. Paid leave meeting certain conditions gives employers a general business tax credit of 12.5% to 25% of wages paid to qualifying employees. The credit applies to tax years 2021 through 2025. For more information on the requirements for the tax credit, visit the Mercer website.
Talk With a Broker to Learn More
Employee benefits are a proven winner – and employer differentiator – for workers. Last year’s MetLife Annual Benefit Trends Study found 85% of employees put health insurance at the top of their “must have” list. Another 10% say it is “nice to have.” If you want to learn more about the potential cost to your business for employee benefits – and the range of health insurance options available – talk with a broker. If you don’t have a broker, you can search for one on the MyCalChoice website.