It’s nearly everyone’s least favorite time of year: tax season. But, working with Word & Brown, you have access to a broad range of plans, products, and services that offer potential tax and other savings to your individual and group insurance clients.
Individual Health Insurance Tax Deductibility
If you offer individual health insurance to your clients, they may be able to include their health insurance premiums in their medical expense calculation on their taxes. It is important to note, though, that certain premiums are not eligible for deduction, including:
- Life insurance policy premiums
- Insurance for loss of function, sight, or life
- Loss-of-earning insurance policies
- Car insurance policies covering medical care for anyone injured by or in a client’s car
- Insurance policies offering a guaranteed amount during hospitalization, injury, or illness
- Premiums paid with tax-free distributions
Your clients may be able to deduct amounts paid for health insurance premiums – for themselves, a spouse, and dependents – as a non-itemized deduction if they are self-employed.
Other health care-related expenses may also be deductible for your clients, depending on their incomes. The IRS allows deduction of eligible unreimbursed medical expenses that exceed 7.5% of a person’s adjusted gross income (AGI). More information on the topic is discussed in IRS Publication 502.
Tax Deductibility of Employee Benefits
In general, if your clients offer health insurance to employees and dependents, premiums paid for that coverage are 100% deductible by the business as an ordinary business expense. Clients can deduct those expenses from their federal income taxes as well as state income taxes.
If your clients are in a business partnership, part of a Limited Liability Company (LLC), or a shareholder with two percent or more of stock in an S corporation, deductions are a little more complicated. You should suggest they speak with a tax advisor concerning the potential deductibility of health insurance costs.
For employees, contributions they make toward the cost of their health coverage are not directly deductible on their personal tax returns. However, those amounts can be deducted from their income on a pre-tax basis if your clients offer a Section 125/Premium Only Plan (POP). See below for more information.
Account-Based Plans Offer Savings, Too
HDHPs and HSAs
If any of your clients’ employees are enrolled in a High Deductible Health Plan (HDHP), they may be able to set aside funds on a pre-tax basis in a Health Savings Account (HSA). They can use these funds to pay for eligible medical expenses, dental, and vision care as well as their health plan copays and deductibles.
If your client’s business makes contributions to these HSAs, those contributions are typically tax deductible for their business, too. Contributions are limited to amounts set annually by the IRS.
For 2024, HSA contributions were limited to $4,150 for self-only health insurance coverage. The family coverage contribution limit was $8,300. For those age 55 and older, an additional $1,000 was permitted as a catch-up contribution. Contribution limits for 2025 are slightly higher: $4,300 for self-only coverage and $8,500 for family coverage. The $1,000 catch-up contribution remains the same for those eligible.
The combination of an HDHP and POP (described below) can yield a total payroll deduction in the range of 25% to 40%.
Health Reimbursement Accounts (HRAs)
An employer-funded HRA (sometimes called a Health Reimbursement Arrangement) provides employees with tax-free reimbursements for qualified medical expenses — up to a set limit per year. Unused funds can be rolled over and used in later years. Employers can deduct their contributions to employees’ HRAs as a regular business expense.
Flexible Spending Accounts (FSAs)
An FSA allows employees to put aside funds on a tax-free basis to pay for out-of-pocket medical expenses like copayments, deductibles, and prescriptions. FSA contributions are deducted pre-tax for employees, so they do not pay taxes on these funds. Generally, amounts left over at the end of the year are forfeited; however, some businesses allow employees to carry over up to $500 in leftover funds to spend the next year. Employees need to carefully consider their selected FSA amount to avoid potential forfeiture.
Other Possible Business Deductions
Small businesses that are unable to sponsor a group health plan may be able to take advantage of other tax benefits. For example, under federal law, some qualifying businesses may fund special health care reimbursement accounts, as mentioned above. These can be used to fund the private purchase of individual or family health insurance plans by employees.
Employers with fewer than 50 employees can offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). A QSEHRA allows small businesses to provide non-taxed reimbursement of certain health care expenses, such as health insurance premiums and coinsurance amounts. More information about QSEHRAs is available on the HealthCare.gov website.
Word & Brown Value-Added Extras
When you offer employee benefits to clients, and that coverage is written through Word & Brown, you’re able to take advantage of multiple value-added extras. These may allow your clients to save on taxes or in other ways.
COBRA Administration: Your groups of 20+ employees enrolled in Medical coverage through Word & Brown are eligible for free COBRA administrative services. This allows insured workers and eligible dependents to maintain their health insurance coverage after employment ends in certain circumstances. Talk with us about all of the details.
Premium Only Plans (POPs): Also known as a Section 125 Cafeteria Plan, a Premium Only Plan enables enrolled employees to pay their health insurance premiums with pre-tax dollars. Plus, your clients can save on Federal Insurance Contribution Act (FICA) taxes and Workers’ Compensation.
ERISA Compliance Assistance: ERISA compliance can be a challenge for employers. Word & Brown offers an array of valuable ERISA resources, including a reporting and disclosure guide for employee benefit plans, EFAST2 Form 5500 and 5500SF filing tips, and much more.
Disclaimer
Federal and state tax laws are complex and subject to change. It’s strongly recommended that your clients consult a tax professional for personalized advice. All employers’ tax circumstances are different. Although this article includes useful information on potential tax savings available, it should not be considered professional counsel. Word & Brown is neither a tax expert nor financial advisor.
