Healthcare costs aren’t cheap, but you can lower the bill for both you and your team by using one of the tax plans available to small businesses. Each plan has its pros and cons, but taking a little time to understand your options and putting one into place can begin paying back immediately.
The Different Health Tax Plan Options
If you have more than 50 ‘full-time equivalent’ employees, you’re subject to specific rules on what health coverage you’re required to offer. But for ‘small employers’, there’s greater flexibility in the types and extent of plans you can setup. Here’s a run down of different options:
- Self-employed health insurance deduction: This isn’t a “plan” per se, but simply a tax provision that allows business owners to deduct their health insurance premiums on their personal tax return (non-business owners typically aren’t able to). It’s available to Schedule C businesses, as well as S-corporations and Partnerships (for which there’s peculiar accounting process that has to be followed).
- Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs): That’s a mouthful, but the gist is that employees have their own qualifying health plans and the company can reimburse them tax-free for health costs (including health premiums) up to a self-defined limit that’s no more than $5,150 for self-only coverage / $10,450 for family coverage. (2019 figures) Business owners themselves, however, are excluded from QSEHRAs.
- Health Reimbursement Arrangements (HRAs): The “regular” HRA is based on similar principles except that: (a) it typically has to be paired with an employer-sponsored health plan (though not required to be employer-paid), and (b) the self-defined reimbursement limit can be whatever you decide (not capped at the QSEHRA figures above). So this can be an option if you have a bigger budget.
- Health Savings Accounts (HSAs): As long as employees have ‘high-deductible health plans’, the business can choose to make tax-free ‘comparable contributions’ into each eligible employee’s HSA (capped at $3,500 self-only coverage / $7,000 family coverage for 2019) . Once in the account, the funds can be used by the employee to cover qualified medical expenses (which doesn’t include health premiums). Two nice feature of HSAs are that unused funds carry over, plus are portable with the employee.
- Cafeteria Plans: Like its name sounds, cafeteria plans are a little bit of a catchall. The gist is that employees can earmark part of their wages to go into the plan tax-free, then use that money towards various benefits available inside the plan. One version is called a Premium Only Plan (POP) which means the money goes towards health insurance premiums. Another version has a health Flexible Spending Account (FSA) capped at $2,700 for 2019 which can be used towards qualified health costs (not including health premiums). And there’s other variations too.
- Employer-provided health insurance: Of course, there’s always the traditional route available too: establish a group health plan and pay employees premiums on their behalf. Payments are tax-deductible to the business, and tax-free to the employees. Managing group premiums becomes very important in this scenario.
Deciding the Best Health Tax Plan for Your Business
Given the variety of options available, how do you decide which is right for your business? Some of the questions we help entrepreneurs step through include:
- Do you want employee’s health care tied your business? Establishing a group plan under your business can make sense in certain scenarios, but it does mean your employee will lose coverage whenever they make a move, which would be a bummer. (This is a long-standing failure of how health insurance is structured in my opinion – no other insurance you buy is dependent on your employer.)
- How much money is available to use towards a health tax plan? If there’s little to none, a Premium Only Plan with employees paying premiums but achieving savings by using pre-tax dollars can be a good option. If there’s lots, a standard employer-sponsored and paid-for plan may be the way to go. And in between, one of the Health Reimbursement Arrangements will likely do the trick.
- What are the tax savings for you and your team? Most of the plans result in lowering your payroll taxes since you don’t have to match Social Security and Medicare on pre-tax dollars. For the same reason, your employees also reduce their income tax because a greater portion of their compensation is in tax-free money — this is effectively a higher wage for them. And depending on which plan you go with, you may also end up deducting your own health costs which otherwise wouldn’t have counted.
- How do the tax savings compare to the plan costs? Most of these plans should have a third-party administrator to keep all the ducks in a row (believe me, you don’t want to do the required paperwork). There are many cost-effective alternatives out there, and many times the tax savings offsets some if not all of the costs, but it’s still something to figure into your math. Keep in mind that some of the “cost” is intangible: your payroll process will likely need to include new routines.
Making the First Step
So looking back at the options, which one(s) seem the best fit for your business?
The above are good highlights to understand your options, but a word of caution: health tax laws have plenty of technicalities, so definitely run the scenario by your business and tax adviser before pulling the trigger. For members of the Elements Circle, simply send us a contact request to chat with your Tax & Accounting Designer. And to consider becoming a member, see if we might be a good fit and request your personal Coffee Conversation.
Either way, taking another look at health tax plans can result in smart moves that optimizing the tax for you, your business, and your team.