Employee BenefitsHealth InsuranceTax Planning

Turn employee health expenses into tax savings

Small business employers who do not offer an employee health plan are missing out on valuable tax savings. These small firms may be understandably nervous about offering employee health benefits. Less than half of small firms even try. We’ve heard about high costs of medical care and health insurance that rise year after year. This cab be intimidating. But these factors don’t need to be the employer’s problem in a well designed employee health plan. In fact, it is possible to achieve tax savings without exposing the employer to either of these things.

It was not surprising, that when I noticed that a small business client could actually save money by offering a limited benefit employee health plan, the employer was nervous when we discussed a plan to save taxes. Another accountant even said that what I proposed couldn’t be done; apparently based on his understanding of the old laws. I pointed out how much things have changed in the evolution of the Affordable Care Act. Small business employers that used to be the primary provider of health benefits are now a supplemental provider. Instead of covering the ‘big stuff’ it is more advantageous for small businesses to reap tax benefits for the routine care and out-of-pocket medical expenses incurred by employees.

The best part of this tax planning project was that both the employer and the employee benefit from tax savings. That means that both the employer and the employees have reason to get involved to ensure that this plan get started.

The amounts saved were modest when we consider a single month basis, but it was ‘free money’ nonetheless. The tax savings, once established, accrue month after month, year after year. We set up a Health Reimbursement Arrangement and voluntary supplemental insurance plan that met all current legal requirements. That netted an employer tax savings of $430 for each of the employees and a tax savings of just over $1,000 for each employee. To make the deal even better, we were able to realize a savings in payroll processing costs of $130 per month, in addition to the tax savings.

The total combined savings to the employer and employees was about $8,710 in just the first year! 

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