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Small-Sized and Medium-Sized
Business Employers
Tax Benefits of Health Insurance
and Other Health Benefit Options
Group Health Tax Benefits
- Tax advantages help make the cost of purchasing
group health insurance much more manageable and
affordable.
- The general rule is that any expenses an employer
incurs related to health insurance are 100% tax
deductible as ordinary business expenses.
Employers are taxed on the difference between revenue and expenses. Since the
cost of health premiums is an expense, the profit is less, thus saving federal
income taxes in a single year. When FICA (Federal Insurance Contributions Act)
taxes (Social Security and Medicare) and state taxes are included, additional
savings are made. See the example below:
The owner of an eight-person firm (with seven
dependents) offers health insurance, and everyone participates. The total
premium annually is $48,000. The employer has agreed to pay 70% of the premium,
which would be $33,600 per year. However, tax benefits greatly reduce this cost
by about 40% (this assumes the business is in the 27% tax bracket).
| Employer's
cost of health insurance premium without tax savings |
$33,600 |
| Savings in income tax per year
because the premium is tax deductible |
$33,600 x
0.27 = $9,072 |
| Savings in FICA and state taxes
(assumes state taxes are 5%) |
$4,250 |
| Total tax savings |
$9,072 +
$4,250 = $13,322 |
| Cost of health premiums with tax
savings |
$20,278, or
40% of the employer's cost of the health insurance premium |
Tax Savings from Other Health
Benefit Options
- Health savings accounts
(HSAs) and health reimbursement arrangements
(HRAs) are alternatives to traditional health insurance coverage that employers can offer
employees. HSAs and HRAs allow employers and/or employees to set aside
pre-tax income to cover medical expenses. These health benefit options are most
often combined with a higher deductible
premium health insurance policy.
- As long as funds are spent on qualified medical
expenses,* businesses may take federal and state income deductions and payroll
tax savings (FICA) for employer contributions to HSAs and HRAs and their
accompanying higher deductible health plans.
Employees also receive tax savings.
- Flexible spending accounts
(FSAs) are similar to HSAs and
HRAs except they are generally used to
supplement traditional health insurance
benefits, not as an alternative. FSAs also allow employers and/or employees to
set aside pre-tax income to cover qualified medical expenses.* There are
federal and state income tax savings and payroll tax savings (FICA) for
employers and employees.
*Qualified medical expenses are defined
in section 213 (d) of the Internal Revenue Code. They include blood tests,
hospital bills, x-rays, vaccines and hearing aids.
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