Tax season is in full swing. As a business owner, you would be smart to evaluate all tax write-offs, deductions, and credits available. So, what about health insurance? Can health insurance costs be a tax write-off? In some cases, yes. In this article, we’ll summarize tax advantages for various small business health insurance scenarios.
Health Insurance Tax Deductions for Businesses
When your business offers a formal health benefit plan, or formal contribution to employees’ health-care costs, the expense can generally be written off as a business deduction.
Common types of benefit plans and contributions that are tax-deductible to the business:
- Payments made to group health insurance premiums
- Payments (“reimbursements”) made through formal medical reimbursement plans, such as Health Reimbursement Arrangements (HRAs)
- Payments (“contributions”) made to Health Savings Accounts (HSAs)
In these scenarios, employees also receive tax advantages. For example, employees’ payments for group health insurance premiums or HSA contributions can be paid for with pre-tax contributions. And, reimbursements received through an HRA are received tax-free (not included in employees’ gross income).
More information on tax-free employee health benefits can be found in IRS Publication 15-B.
Health Insurance Deductions for Self-Employed
If you are self-employed, you may have additional opportunities for health insurance deductions.
Most self-employed taxpayers can deduct health insurance premiums, including age-based premiums for long-term care coverage via the line 29 deduction on the 1040 return. To be eligible, your business income must show a profit and you cannot be eligible for employer-provided insurance (e.g., from a side job or a spouse’s job), among other criteria.
Health Insurance Tax Credits for Businesses
In addition to the standard tax deductions, some smaller businesses may qualify for health insurance tax credits. As part of health reform, there are tax credits available for small employers who meet all three of these requirements:
- The company employs fewer than 25 employees, who make an average of $50,000 or less each year.
- The company offers a group health insurance policy and covers at least 50 percent of the premium costs.
- The company purchases the policy through the SHOP Marketplace, if SHOP plans are available.
Qualifying businesses may receive up to 50 percent of the contribution made toward employee premium costs. Businesses are not required to offer coverage to part-time employees in order to be eligible.
Health Insurance Tax Credits for Employees
In addition to tax credits for employers, there are health insurance tax credits available to eligible employees who purchase health insurance on their own. The health insurance tax credits can significantly lower the cost of health insurance.
To be eligible for the health insurance premium tax credits, you must:
- Purchase a policy available on your state’s Marketplace (e.g., HealthCare.gov).
- Meet certain income limits.
- Not be eligible for employer-provided health insurance.
- Not be eligible for a government-provided program such as Medicaid.
Example—Tax-Free Health Insurance Reimbursement
To illustrate the tax advantages of a common small business approach, here is an example of the tax advantages of using a formal health plan to reimburse individual health insurance premiums.
A 20-person company in Seattle, Washington, offers $300 a month to employees to purchase their own health insurance policy. To do so in a compliant and tax-free way, the company uses a formal health reimbursement plan to reimburse employees for eligible premium costs.
For the employer, all reimbursements made through the plan are not subject to payroll taxes (FICA/FUTA). Therefore, the cost of providing a $300/month benefit is $300/month. As the chart shows below, the company saves $23/month per employee compared to providing a taxable bonus or raise.
Employees also realize tax savings. Reimbursements employees receive through the formal plan are not taxed. As the chart shows below, an employee receiving a $300 reimbursement through a tax-free plan receives $75 more each month, as compared to a taxable benefit.
To summarize, can health insurance costs be a tax write-off for businesses and owners? Yes. In certain situations and with certain benefit offerings, there are tax deductions, exclusions, credits, and advantages to both employers and employees.
What questions do you have about health insurance costs and taxes? Leave a comment below and we’d be happy to help.