As health insurance plays a bigger role in our political discourse, it becomes even more of a concern for small businesses. Already, more businesses are required to offer health insurance than in years past, and more individuals are demanding health coverage as a condition of their employment.
When you consider the effects on employee retention, offering health benefits may make smart financial sense. Health insurance plans are shown to be correlated with high employee satisfaction, even more so than paid-time-off (PTO), retirement plan offerings, and “work from home” options.
Yet health benefits can still feel like a mystery, especially when taxes are concerned. Which plans are available to me? Are they deductible? How will they affect my tax position? There is no one right solution, but there are a few offerings that are worthwhile for a small business to consider.
Self-Funded Health Insurance
While traditional group health insurance may be a bit out of your price range, self-funded health insurance may be an option. Unlike traditional group plans where the insurance company owns the risk, self-funded plans place all the financial risk onto the business directly. However, the business gets to save on administrative fees that would typically go to the insurance broker, and they don’t have to forfeit any tax benefits to do so. The tax implications of a self-funded health plan are the same as a fully insured plan. All expenses incurred to run the plan, including administrative fees, premiums, and claims, are fully deductible business expenses.
Association Health Plan
Association health plans (AHPs) have been available to small businesses only recently. These plans provide groups of businesses in the same industry, profession, or geographic region the opportunity to jointly purchase large-group health insurance coverage. They are provided more freedom than fully insured plans because they can bypass some limitations imposed by the Affordable Care Act (ACA). Much like with self-funded health insurance plans, the costs of running these plans are fully deductible.
Qualified Small Employer Health Reimbursement Arrangement
A qualified small employer health reimbursement arrangement (QSEHRA) is — as it sounds — a health reimbursement arrangement (HRA) for small businesses. HRAs are plans funded by employers that reimburse their employees for out-of-pocket medical expenses — tax free. In addition to saving tax dollars on health benefits, QSEHRAs are quite flexible. Small businesses are not bound by arbitrary reimbursement limits, do not have to worry about meeting specific reimbursement rates, and can be selective about what costs they do reimburse. While these plans are not health insurance in and of themselves, they can help lower employees’ health care costs.
One-Person Section 105 HRA
One-person HRAs provide their participants with tax-free reimbursement of out-of-pocket medical expenses and are fully deductible to the employer. Recent healthcare reform limits their usefulness as group health plans, but they provide great benefits when they are set up for just one participant. Despite the limitations, business owners should consider this option because one-person HRAs effectively convert what would be personal deductions into business deductions. This conversion will (1) reduce taxable business income, (2) lower self-employment taxes, and (3) make more expenses eligible for a deduction. The self-employed health insurance deduction only allows a deduction for premiums paid, but under a one-person HRA, a business owner can deduct premiums, long-term care insurance, medical expenses, and prescriptions on their personal return. Deductions arising from a one-person HRA can even reduce business income below zero, which is something the self-employed health insurance deduction cannot do. This loss can be carried forward to offset business income in future years.
Time to Strategize
Small businesses like yours may feel that the costs of health insurance are too heavy to bear, but you should consider the flexibility you have. A multitude of options are available to help your employees save money on medical expenses, and there is no one correct path to take. Together with your CRI tax advisor, you can make the decision that is the best fit for your small business.