Tax season is here. Are you ready? Will you take advantage of the tax breaks available to you? Keep in mind, if you’re offering employee health insurance and paying part or all of the premium, you can deduct those expenses.
You could also be subject to Affordable Care Act (ACA) penalties in connection with your taxes. For example, if you are an Applicable Large Employer (ALE) and you’re not complying with the ACA employer mandate.
Here are important tips on small business taxes related to health insurance and employee benefits.
Insurance Costs Are Deductible
Generally, employers can deduct 100% of their contributions to premiums paid for health insurance for employees and/or their dependents. That’s true for your business’s federal and state income taxes.
The Internal Revenue Service (IRS) says if your business pays for accident and health insurance, those payments are not considered wages. They are not subject to FICA (the Federal Insurance Contributions Act), which is a combination of Social Security and Medicare, and FUTA.
If your firm is S Corporation, however, the rules differ. If an employee owns more than two percent of the corporation, the cost of health insurance benefits must be reported as income. For more information and links to other useful resources, visit the IRS’ “Employee Benefits” web page.
Reducing Your Payroll Taxes
You can reduce your company’s payroll taxes with a Premium Only Plan. Offering a Section 125/Premium Only Plan (POP) also gives your employees the ability to pay for their portion of their insurance premiums on a pre-tax basis. In addition, their cost may be lower. That’s compared to what they would pay on their own if they had to buy comparable individual coverage.
Employees with a High Deductible Health Plan (HDHP) can reduce their taxes, too. Amounts contributed to Health Savings Accounts (HSAs) lower their taxable income. The POP/HDHP/HSA combination can yield a total payroll deduction of 25% to 40%.
Your business can also usually deduct HSA contributions (on behalf of employees). That further reduces your small business’s taxes.
Potential Added Tax Savings
Offering paid medical leave to employees could provide your business with a tax credit ranging from 12.5% to 25%. 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.
If you offer employees a Health Flexible Spending Account (Health FSA), they can use pre-tax dollars to pay for qualified care. Eligible expenses can include Health, Dental, and Vision expenses, such as coinsurance, copayments, deductibles, medication costs, Dental care, eyewear, etc.
For those who qualify, a Dependent Care Assistance Plan Flexible Spending Account (DCAP FSA) can be used to pay for care for employees’ dependents under the age of 13.
The maximum FSA contribution by employees for a Health FSA in 2023 is $3,050. Your business can contribute up to $500 per employee. You can also match dollar-for-dollar contributions. However, you cannot do both – and you do not have to do either.
An FSA offers tax savings to employees because they can save on out-of-pocket expenses they may already be paying. FSA contributions lower employees’ taxable income and increase their tax-home pay.
ACA Reporting and Penalties
If you’re an Applicable Large Employer (ALE), you must report annually on health insurance offered to employees and dependents. A key question is whether that coverage is “affordable” and offers minimum value.
What matters is whether you have 50 or more full-time and full-time-equivalent employees (FTEs). If you’re not sure whether your business is an ALE, there’s a calculator to help you. In fact, you can find multiple ACA Calculators on the CaliforniaChoice website. There’s a Full-Time Equivalent Calculator, an ACA Penalties Calculator, and information about ACA Safe Harbors. (You might also be interested in our prior blog post, How to Help Your Company Avoid ACA Penalties.)
If your company is an ALE and you do not comply with the mandate, the ACA “A” penalty (under Section 4980H(a) of the Internal Revenue Code) may apply. That occurs if any employee obtains individual ACA-complaint coverage through a state Exchange (like Covered California) and uses a Premium Tax Credit (PTC) to pay for it.
The penalty, assessed monthly, is equal to the number of FTEs (minus the first 30) multiplied by one-twelfth of $2,750 for plan year 2022 (or $2,880 for 2023). We discuss this more in our prior blog, which you can link to above.
ACA employer penalty “B” (under Section 4980H(b) of the Internal Revenue Code) could apply instead. That happens when an employer offers Minimum Essential Coverage (MEC); however, coverage does not offer minimum value and/or is not affordable at the employee-only rate.
Determining Your Qualification
The information shared here is informational only. It is not intended to be tax, legal, or accounting advice. Your accountant, auditor, or tax advisor can discuss your specific circumstances. That includes whether you qualify for tax benefits or could be subject to the ACA penalties described.
Your employee benefits broker can provide information on different health insurance options for your business. You might want to consider the CaliforniaChoice multi-carrier small business health insurance exchange. It offers HMO, PPO, and other options from eight health plans across California – all through a single program. If you don’t have a broker, it’s easy to search for one.