As organizations evaluate health benefits where you reimburse premiums, instead of paying them, it is common to have questions about how a formal, tax-advantaged plan is a better value than giving employees cash. In this article, we’ll walk through the tax-advantages - and cost savings - of using a tax-advantaged Health Reimbursement Plan.
Tax Benefits for Your Organization
Using a formal reimbursement plan, such as a Health Reimbursement Plan, reimbursements made to employees are tax-deductible - the same way contributions to other benefits are.
This means your company saves on FICA/FUTA payroll taxes. Here’s an example.
|Employer Contributions||Cash||Tax-free Reimbursement Plan|
|Payroll Taxes (7.65%)||$23||$0|
|Total Cost of Contribution||$323||$300|
As you can see in the chart, with a tax-advantaged plan, the cost of providing a $300 reimbursement costs $300.
By providing cash, the cost of giving $300 is $323.
Tax Benefits for Employees
Using a tax-advantaged plan, reimbursements received by employees are tax-free - meaning they are not included in employees’ gross income and employees do not pay income tax on the reimbursements.
Here’s an example.
|For Employees||Cash||Tax-free Reimbursement Plan|
|Taxes Paid (25%)*||-$75||$0|
|Total Amount Received||$225||$300|
*Rate varies by tax bracket
As you can see in the chart, when employees receive a $300 reimbursement with a tax-advantaged plan, the real take-home amount is $300.
When employees receive $300 in cash for health insurance, the real take-home amount is $225.
Bonus Tax Benefits for Employees - Premium Tax Credits
As an additional bonus for employees, employees can access all the perks of the modern individual health insurance market, including premium tax credits.
In the federally-run Marketplace, 87 percent of those who selected a health plan received a premium tax credit and paid, on average, only $82/month.
The premium tax credits for individual health insurance offer additional savings to employees on the cost of health insurance. And, provides additional value to company dollars.
When it comes to reimbursing employees’ individual health insurance, the bottom line is tax-free reimbursement is a better value than cash. For example with cash, the employer pays $323 to offer a tax-home contribution of $225. With a tax-free reimbursement, the employer pays $300 to offer a take-home contribution of $300. Additionally, a formal health benefits package helps smaller employers compete with larger companies for top talent.
To learn more about how to set up and administer a tax-advantaged reimbursement plan, download this free guide.
Do you have questions about the cost-savings or tax-savings of a tax-advantaged reimbursement plan? We’re happy to help. Leave a comment or question below.