How to Maximize Your Tax Return with Group Health Insurance Deductions

Note: The original article from 2016 has been updated to provide relevant information for the 2023 tax year.

As a small business owner, it’s essential to take advantage of every opportunity to maximize your tax return. One often overlooked deduction is related to health insurance expenses. By providing health insurance coverage to your employees, you can benefit from various tax deductions and incentives.

Under current law, employer-paid premiums for health insurance remain exempt from federal income and payroll taxes. This exclusion represents the nation’s largest annual tax expenditure, costing the government an estimated $260 billion in income and payroll taxes in 2023 (source: New York Times).

Critics argue that the tax subsidy for employer-sponsored health insurance contributes to the rising cost of healthcare. However, this deduction remains intact, as it encourages employers and employees to invest in comprehensive health insurance plans with reduced cost-sharing and managed care.

In 2016, The American Health Care Act (AHCA), also known as Trumpcare, considered eliminating or capping the employer tax break for health insurance. However, the final version of the bill did not include these changes. As a result in 2023,  more than 175 million Americans (55% of the US population) still receive their health coverage through their employers.

Every dollar spent on employee wages is subject to income and payroll taxes. However, each dollar spent on employee health insurance is tax-deductible. This deduction extends to contributions/reimbursements made through a Health Reimbursement Arrangement (HRA) and contributions to employees’ Health Savings Accounts (HSAs).

In addition to standard tax deductions, small businesses may qualify for a health insurance tax credit under the Affordable Care Act (ACA). Qualification criteria depend on factors such as group size, contribution towards employee premiums, and the method of purchasing coverage. Consult with your accountant to determine if your business qualifies for this credit.

When comparing health plans for your employees, it’s beneficial to work with a benefits broker who can provide valuable assistance. If you don’t have a broker yet, CaliforniaChoice can help you find a local broker specializing in group health insurance for your business.

Remember, understanding and utilizing available tax deductions can significantly impact your business’s financial health. By providing health insurance coverage to your employees, you not only invest in their well-being but also reap the benefits of tax deductions.

Key Takeaways:

• Employer-paid health insurance premiums remain exempt from federal income and payroll taxes, providing a valuable tax deduction for small businesses.

• The tax subsidy for employer-sponsored health insurance remains intact, encouraging employers and employees to invest in comprehensive health insurance plans.

• Contributions/reimbursements made through Health Reimbursement Arrangements (HRAs) and employee Health Savings Accounts (HSAs) are also tax-deductible.

• Small businesses may qualify for a health insurance tax credit under the Affordable Care Act (ACA), depending on factors such as group size and premium contributions.

• Consulting with a benefits broker can provide valuable assistance when comparing health plans and navigating tax deductions.

Things to Know:

1. Tax Exemption: Employer-paid health insurance premiums continue to be exempt from federal income and payroll taxes, providing a significant tax advantage for small businesses.

2. Deductible Contributions: Contributions made through HRAs and employee HSAs are tax-deductible, allowing for additional savings on health insurance expenses.

3. Health Insurance Tax Credit: Small businesses may qualify for a tax credit under the ACA, which can further reduce the cost of providing health insurance coverage to employees.

4. Benefits Broker: Working with a benefits broker, or group health insurance program such as CaliforniaChoice, can help businesses find the right health insurance plans and navigate the complexities of tax deductions.

5. Consult with Professionals: It is recommended to consult with qualified professionals, such as accountants or tax advisors, to understand the specific implications and opportunities for your business.

Disclaimer: This article is intended for informational purposes only and should not be construed as legal or financial advice. Please consult with a qualified professional regarding your specific circumstances.