Healthcare for Small Businesses

Arla Wallace is an accounting professional with over 20 years experience. She spent several years working for both publicly-traded and private entities before founding her own business. Today she partners with small business owners so they can focus on operations while leaving the responsibility of staying on top of accounting tasks to her. She is a Certified Public Accountant (CPA) and a Certified ProAdvisor for Quickbooks Online.

Healthcare for Small Businesses

The Affordable Care Act provides tax provisions, some of which are solely for the benefit of small businesses. To qualify for such healthcare tax credits and benefits, small businesses must generally have fewer than 50 full-time employees (FTEs). Below is a summary of both the health insurance options and tax incentives currently available to small business owners.

Small Business Health Insurance Options

Group health insurance, quite arguably, is the best understood option by small business owners. However, it is not the only option and is not always the best choice. In addition to group health insurance, below are several alternative choices that allow small businesses to not only control costs but also enable employees to make their own health care selections.

Individual Coverage Health Reimbursement Arrangement (ICHRA): An alternative to traditional marketplace plans, in an ICHRA arrangement, employers pay out monies to employees only when a claim is made and approved. In this plan, employees pay for insurance themselves and file a claim to be reimbursed. There are no restrictions on employee count; therefore, this arrangement works for employers for all sizes.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA): Employers with less than 50 employees are eligible for the QSHERA. Similar to an ICHRA, the business establishes an allowance amount. Employees can enroll in an individual health insurance policy and seek reimbursement for their out-of-pocket expenses up to this allowance amount.

Group Coverage Health Reimbursement Arrangements: Group Coverage HRAs are available to small businesses that have employees participating in a group health policy. Employees can use the HRA to cover expenses such as copays, deductibles, and prescriptions. Reimbursements are free of payroll tax for the business and its employees.

Traditional Group Health Insurance: The most common choice among small businesses and typically purchased through an insurance broker or the Small Business Health Options (SHOP) marketplaces. Small businesses pay a fixed premium for the policy and may pass a portion of the premium cost on to employees. Copays and deductibles associated with the group policy are paid by employees. While this type of plan is easy to obtain, premium prices continue to rise.

Self-Funded Health Insurance: Employers seeking to escape expensive premiums along with group health insurance restrictions may choose to self-insure. In a self-funded plan, contributions by both the business and its employees are made to a trust fund. While administrative costs can represent cost savings to a small business employer, these plans are not without risk. A larger than expected claim could put a small company out of business.

Tax incentives for Small Business Owners

Small business owners may qualify for one or more health insurance tax deductions and credits. Such benefits include the following:

Self-employed health insurance deduction: The cost of premiums paid for medical, dental and long-term care insurance are deductible for yourself, your spouse and dependents under the age of 27 years old. To qualify, you must have self-employment income as a partner through income on a K-1 or as an employee of an S-Corporation who owns 2 percent or more of the corporation’s shares of stock.

Small business health care tax credit: Your small business may be eligible to deduct up to 50 percent of the costs paid by you for your employee’s premiums (35 percent for non-profit employers) offered through a SHOP plan. To qualify, you must have less than 25 FTEs, employee salaries must be $50,000 per year or less, and you must pay at least 50% of the health care premium costs for your employees.

HSA deduction: Provided you enroll in a health insurance plan that is eligible for a health savings account (HSA) and you contribute monies to the HSA, your contributions are deductible. The annual limit for the deduction in 2021 is $3,600 for individuals with self-only coverage and $7,200 for a family. HSAs are generally only available through high-deductible healthcare plans.