Tax advantages for health care benefits in 2024
By Courtney Warren
June 17, 2024
Please note that this information is not intended as tax or legal advice. If you have any questions, contact a tax or legal professional.
In today’s competitive labor market, employers need every advantage to recruit and retain good people.
Consistently, the most important benefit to employees is health insurance. But with the continually rising cost of health care premiums, it can be difficult for smaller companies to offer this benefit for their employees.
As a trusted advisor, you can assist your clients in offering health care benefits that fit their businesses and their budget. Beyond the value of offering benefits to employees, your clients may be able to manage costs through certain tax advantages. For instance, a business can typically deduct 100% of what it pays toward health insurance premiums and contributions to health benefits plans. Such deductions can significantly reduce taxable income and lower overall tax liability.
Tax incentives and advantages associated with providing health benefits — from deductions to tax credits and payroll tax reduction — vary depending on the business's nature, size and location. Still, they are worth exploring when deciding which employee health benefits suit your clients' organization. And because this landscape is constantly changing, it pays to stay up to date with the latest legislative changes.
Health benefits options to consider
There are several types of health insurance benefits that offer employers financial advantages. There are also some newer options like ICHRAs (individual coverage health reimbursement arrangement) and QSEHRAs (qualified small employer health reimbursement arrangements) that give employers both tax advantages and budget control.
Here are health care benefits options for your clients:
Traditional group health insurance may include various benefits options, including HMOs, PPOs and high-deductible health plans. Premiums may be tax-deductible for the employer, and pre-tax employee contributions can help reduce payroll taxes, as the contributions are exempt from Social Security, Medicare and federal unemployment taxes.
Small businesses with fewer than 25 full-time equivalent employees and average annual wages below a certain threshold who provide a specific type of group health coverage may be eligible for the
Small Business Health Care Tax Credit, offsetting insurance costs.
Health reimbursement arrangements (HRAs) allow employers who meet specific criteria to reimburse employees for eligible medical expenses, including health insurance premiums.
Individual coverage health reimbursement arrangements (ICHRAs) and
qualified small employer health reimbursement arrangements (QSEHRAs) are the two types of HRAs. Employers' HRA contributions are made pre-tax and are deemed an eligible business expense. HRAs also enable the employer to set contribution limits so no matter how much health insurance premiums may rise, the employer can keep costs in control.
Although QSEHRA is designed especially for small businesses with less than 50 employees, ICHRA, a newer type of HRA that launched in 2020, is for employers of all sizes with no limits on annual allowance.
Minnesota has a very competitive, vibrant individual health insurance market with an abundance of options and carriers, offering individuals a prime opportunity to take advantage of ICHRA. Minnesota has been an early ICHRA adopter and continues to be a leader in ICHRA implementation.
Premium only plans (POPs)* allow employees to pay a share of traditional group health insurance premiums with pre-tax dollars. Premiums are the only eligible expenses under this type of Section 125 plan. Pre-tax contributions result in immediate tax savings for employees and lower employers' payroll taxes.
Health savings accounts (HSAs) are paired with high-deductible plans (HDHP) to help employees pay for qualified medical expenses. Employees' pre-tax contributions help reduce payroll taxes, and HDHPs typically have lower premiums than other plan types, making this an attractive option for cost-conscious clients.
Flexible spending accounts (FSAs) are often paired with traditional group health plans to
help employees pay for health care costs. Employees can contribute pre-tax dollars to their FSAs, and depending on how the plan is structured, the employer may also be able to contribute, helping to reduce the payroll tax burden. Another potential advantage of FSAs is that "use-or-lose" rules may apply, wherein unused funds may be returned to the employer.
A smart business decision
As you look for tax advantages to help your clients positively impact their bottom line, why not also help them invest in the well-being of their workforce? Begin with a defined employer benefits strategy that considers your client’s business goals, their employees’ needs and their budget.
Courtney Warren is the VP of Strategy and Business Development for ADPIA, with six years of experience leading employee benefit and cost containment strategies for small businesses. For more information, contact 855-237-5335.
* Participants in a Premium Only Plan (POP) can save on federal income taxes, state income taxes in most states, and Social Security/Medicare (FICA) taxes. Employers can save on the matching portion of FICA taxes and federal unemployment taxes and on state unemployment taxes in many states. State income tax rules vary by state. Check with your tax advisor to see how your state treats a POP.
