It’s nearly tax time, and some of your small business clients may be looking for answers concerning tax questions related to offering health insurance and other benefits to employees.
While you don’t want to present yourself as a tax expert, you may want to discuss potential tax savings available to employers because of the benefits they offer to employees.
Health Insurance Is Deductible
As a general rule, employers can deduct 100% of the cost of their employer contributions paid toward employees’ health insurance premiums. These costs can be deducted from your clients’ federal and state income taxes for their businesses.
According to the Internal Revenue Service (IRS), if an employer pays for accident and health insurance – including an employee’s spouse and dependents – the employer’s contributions are not considered employee wages. They are part of the “employer tax exclusion.” They are not subject to FICA (the Federal Insurance Contributions Act), which is a combination of Social Security and Medicare.
One important caveat, however, is for employees of S (or Subchapter) corporations. For them, the cost of health insurance benefits must be reported as income – if the employee owns more than two percent of the corporation. More information and links to other resources can be found on the IRS “Employee Benefits” web page.
A Section 125/Premium Only Plan (POP) allows employees to use pre-tax dollars to pay for their portion of group health insurance premiums. This increases employees’ take-home pay and reduces employers’ company payroll taxes.
For employees with a Health Flexible Spending Account (Health FSA), they can use pre-tax dollars to pay for qualified health care. Under the Internal Revenue Code Section 213(d), eligible expenses can include Health, Dental, and Vision expenses, such as coinsurance, copayments, deductibles, medication costs, Dental care, eyewear, etc.
A Dependent Care Assistance Plan Flexible Spending Account (DCAP FSA) can be used to pay for care for dependents under the age of 13. That allows the employee or employee’s spouse to work or look for work.
The maximum FSA contribution by employees for a Health FSA for 2023 is $3,050. Employers can contribute up to $500 per employee. Employers can also match dollar-for-dollar contributions. However, they cannot do both – and employers do not have to do either.
An FSA offers tax savings to employees because they can save on out-of-pocket expenses they may already be paying. FSA contributions lower employees’ taxable income and increase their tax-home pay.
Health Reimbursement Arrangements or Health Reimbursement Accounts (HRAs) are 100% employer-funded group health plans from which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year.
Unlike many FSAs, unused amounts in an HRA may sometimes be rolled over and used in subsequent years. The employer funds the arrangement, and the employer determines if the HRA is a “use it or lose it” account.
The employer’s HRA contribution is 100% tax deductible for the business. Money put into employees’ HRAs are not reported as employee income, so they are able to use tax-free dollars to pay for medical needs.
HRAs are usually integrated with ACA-compliant health plans; when integrated, HRAs are offered only to employees who elect group health coverage – so they can be used to supplement employees’ out-of-pocket costs.
Health Savings Accounts (HSAs): Employers with POPs may permit pre-tax payroll contribution into eligible employees’ HSAs. Employers may also contribute to eligible employees’ HSAs – but they must do so on a consistent basis. The employer’s contributions are 100% tax deductible. Employees do not pay taxes on dollars contributed to their HSAs by their employers.
Employees must be enrolled in an HDHP to contribute to an HSA. For 2023, the HSA maximum contribution limit is $3,850 for self-only coverage and $7,750 for family coverage. Those amounts are up $200 and $450 from 2022. The HSA catch-up contribution for those age 55 or older is $1,000 – in addition to other limits. The contribution limits are the same even if the employee and employer share funding.
Other Potential Tax Savings
Employers offering paid medical leave to employees could earn a tax credit ranging from 12.5% to 25%. A provision of the Consolidated Appropriations Act of 2021 allows businesses offering medical leave that meets certain requirements to take a general business tax credit through 2025. It applies to both family and medical leave of up to 12 weeks per taxable year.
Details regarding requirements of the tax credit are available on the Mercer website.
ACA Reporting – and Possible Penalties
The Affordable Care Act (ACA) employer mandate requires Applicable Large Employers (ALEs) to report annually on health insurance offered to employees and dependents.
Your client’s business could be an ALE if it has 50 or more full-time and full-time-equivalent employees (FTEs). For information about calculating FTEs, read our prior blog, Tips for Helping Clients Avoid ACA Employer Penalties. ADD LINK TO DECEMBER POST
If your client’s company is an ALE and it does not comply with the employer mandate, the ACA “A” penalty (under Section 4980H(a) of the Internal Revenue Code) may be triggered if any full-time eligible employee obtains individual ACA-complaint coverage through a state Exchange (Covered California or Nevada Health Link) and utilizes a Premium Tax Credit (PTC) to pay for it.
The penalty is assessed monthly and is equal to the number of full-time employees (minus the first 30) multiplied by one-twelfth of $2,750 for calendar year 2022 (or $2,880 for 2023). More information is outlined in our prior blog, as noted above.
ACA employer penalty “B” (under Section 4980H(b) of the Internal Revenue Code) applies when an employer offers Minimum Essential Coverage (MEC) that is not considered “affordable” at the employee-only rate or fails to provide minimum value.
Word & Brown offers a variety of ACA Calculators to help you determine whether your clients are subject to the ACA’s employer mandate. One calculator can also help determine potential penalties.
The following tools are available for download on our website:
- Group Size Calculator
- Affordability Calculator
- Full-Time Equivalent Calculator
- Employer Penalty Calculator
- ACA IRS Employer Reporting Calculator
- Medical Loss Ratio Rebate Calculator
For tax year 2022 (reported in early 2023), employers that are considered 2022 ALEs must tell the IRS about their offers of coverage to eligible employees in 2022. They do this using IRS Forms 1094-C and 1095-C.
Forms must be filed with the IRS by February 28, 2023, if submitting via paper – or by March 31, 2023, if filing electronically. ALEs with 250 or more forms must file electronically. Copies must be furnished to employees by March 2, 2023.
Word & Brown is not a law firm, accountant, or attorney. The information shared here is informational only. It is not intended to be tax, legal, or accounting advice. Your client’s accountant, auditor, or tax advisor can provide guidance about your client’s firm and its specific circumstances. One of these professionals can also determine whether your client’s business might qualify for tax benefits or could be subject to the ACA penalties described.
Help When and If You Need It
Experts staff the Word & Brown Compliance team. They are eager to help you and your clients with any questions regarding ACA penalties. Don’t hesitate to reach out via email (ComplianceSupport@wordandbrown.com) or telephone (866.375.2039).