With the new year comes yet another year of tax filing. That means researching updated tax rules, deadlines, and write-offs. When it comes to expenses eligible for tax write-offs, employers may wonder whether health insurance is included.
Can health insurance costs actually be a tax write-off?
The short answer is, yes. In this article, we’ll explore how employers can save with tax advantages for various health insurance scenarios.
Health insurance tax deductions for employers
When an employer offers a formal health benefit, the expense can generally be written off as an expense.
Common types of benefit plans and contributions that are tax-deductible to the business include:
- Payments made to group health insurance premiums
- Reimbursements made through formal medical reimbursement plans, such as health reimbursement arrangements (HRAs)
- 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).
Health Insurance Deductions for Self-Employed
If you’re self-employed, you may have additional opportunities for health insurance deductions compared to other employers. Most self-employed taxpayers can deduct health insurance premiums, including age-based premiums for long-term care coverage. This write-off is entered on page 1 of IRS Form 1040, which means the benefit isn’t dependent on itemizing deductions. To be eligible, your business income must show a profit and you can’t also 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 Employers
In addition to the standard tax deductions, some smaller employers 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 employers 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
Here’s an example of the tax advantages of using an HRA, like the qualified small employer HRA (QSEHRA) 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 QSEHRA to reimburse employees for 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. The company saves $23/month per employee compared to providing a taxable bonus or raise.
Employees also realize tax savings with an HRA. Reimbursements that employees receive through the plan aren’t taxed. An employee receiving a $300 reimbursement through an HRA receives $75 more each month, as compared to a taxable benefit.
This article was originally published February 25, 2016. An update version was posted on 1/11/2021.