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Updated: March 27th, 2020
Healthy and happy employees can make your work environment more joyful and productive. But when you own a small business, there’s a never-ending juggling act of balancing expenses with employee benefits — and few benefits get as much consideration as health insurance.
If you had fewer than 50 full-time employees last year, you don’t need to offer your employees group health insurance. But if you had more than 50 and didn’t offer group health insurance, you may have to pay a penalty.
Regardless of whether or not you have to pay the penalty, you may still want to provide health insurance to your employees as an incentive to attract and retain workers and keep your workforce healthy. Offering group health insurance could also save your employees (and yourself) money on healthcare costs and qualify you for small business tax incentives.
Plus, because insurance payments and medical expense reimbursements aren’t subject to Social Security or Medicare taxes, you can offer your employees a higher total compensation package while limiting your business expenses. In other words, a $50,000 salary with a $5,000 annual health insurance benefit will cost your business less than paying a $55,000 salary without healthcare coverage.
Here’s an overview of the types of health coverage you might want to offer your employees, and the tax benefits you could receive for doing so.
You may be able to choose from several options if you want to start offering your employees health benefits. These four arrangements are some of the most common:
Small businesses may want to use a combined option when they’re trying to limit costs by only offering group high deductible health plans (HDHP), which have lower premiums but a high deductible. As a result, they may cover fewer expenses than non-HDHP insurance plans. You could then help cover some of those potential additional costs, such as copays or prescriptions, with an HRA, FSA, or HSA.
Some businesses also self-fund health insurance for their employees by setting aside money to pay for healthcare costs. Such an arrangement probably isn’t an affordable option for small businesses on its own. However, starting in 2018, small businesses may be able to work together to purchase group-rate coverage or create a larger, more sustainable, self-insured network with an Association Health Plan.
Your business may qualify for the Small Business Health Care Tax Credit if you purchase group insurance through the SHOP marketplace Or, you may still be eligible if you purchase a non-SHOP plan and there isn’t a SHOP plan available in your area.
The credit may be worth up to half of the premiums you pay, and you could receive the credit for up to two consecutive years. However, it starts to phase out for employers who have more than 10 full-time employees, or the equivalent with part- and full-time employees. It also phases out if you pay employees more than an average annual salary of $27,100 (as of 2019, the number is adjusted for inflation).
It’s therefore worth the most for businesses with 10 or fewer employees and that pay them an average annual salary of $27,100 or less.
To qualify, your business must:
You don’t consider yourself, family members, or people who own over 5 percent of a business (including other businesses) when determining whether you’ll qualify.
If you want to quickly see whether you qualify and how much you could receive in tax credits, you can use the estimator tool on HealthCare.gov.
Many healthcare expenses can also be deducted from your business’ revenue, which can lower your profits and taxes for the year.
Deductible expenses could include:
Be careful if you want to directly reimburse employees for the cost associated with purchasing health insurance or medical costs if you’re not doing so through a QSEHRA.
Direct reimbursements without proper coverages and documentation could lead to a $100-per-employee daily penalty. So, it’s generally best to create a similar arrangement with a QSEHRA if you want to offer a reimbursement rather than purchase a group plan for your employees.
Some states also offer small businesses additional tax credits or deductions that could make your healthcare costs more affordable.
Self-employed business owners might not be able to participate in their business’ FSA, HRA, or QSEHRA. However, if you’re self-employed, you may still be able to deduct your health insurance premiums from your income if you bought coverage for yourself, a spouse, and your dependents. If you bought an HDHP plan, you may also be eligible for an HSA.
To qualify, you can’t be eligible for employer-sponsored health insurance from a different employer (if you have a part-time job, for example), or from your spouse’s employer. You also can’t deduct more than you earned in net business income for the year.
Some special rules apply to self-employed S corporation owners, but they’re generally eligible for a tax deduction based on their health insurance premium payments as well. They might just have to jump through a few extra hoops.
Cost isn’t the only factor you should consider when deciding whether to offer health benefits to employees. Some business owners value helping their employees (and employees’ families) stay covered and healthy over earning as much profit as possible. However, you will need to find the right balance of coverage and affordability to maintain a positive cash flow and build a successful business.
Knowing about the savings that can come from lower turnover, more competitive job offers, healthier employees, and tax benefits can help you make a well-informed decision about the net costs of offering healthcare benefits.
Funding Circle believes informed consumers are better consumers. We strive to provide informative and educational content useful for you and your business. However, please note that tax laws and regulations are complex and subject to change. We strongly recommend consulting your financial or tax professional regarding your specific circumstances.