Posted in Offering health benefits

How Health Insurance Tax Deductions Can Save You Money

Buckle up — we’re about to talk taxes. We’re also going to talk about saving money, so the ride will be worth it.

When you arm your team with group health coverage, it comes with a healthy dose of awesomeness. First, it helps keep your team beaming with health. It makes it easier for employees to have everything they need to do great work, and it also helps you build a workplace where people feel valued.

While offering health insurance leads to lot of good things, it’s also an expense you’ll have to take on. The good news is that there are some big time health insurance tax deductions that keep those premiums from adding too much to your bottom line. In fact, the tax break for employers who provide health insurance is the largest in the entire tax code.

That’s right — the biggest deduction that anyone can get — and this savings makes insurance a lot more appealing for you and your employees. In the ultimate win-win, the part of your team’s premiums that you pay can be a tax write-off. If you offer employees a Section 125 cafeteria plan, the premiums they pay reduce their taxable income, and therefore the income and payroll taxes they pay.

Not too bad, right?

Sprinkled throughout the entire tax code are even more hidden gems. Follow along as we highlight the main incentives you can get if you give your team health insurance.

4 tax benefits of employer-sponsored health coverage

1. YOUR PREMIUMS ARE TAX-EXEMPT

Employer-provided health insurance premiums for group health plans are tax-exempt. That means it can lower or even completely erase your tax duties. These tax-exempt premiums came about during World War II when companies were trying to evade wage and price controls and have been a part of our health policies ever since. Today’s headlines have a lot of discussions about the future of healthcare. While some changes may be on the way, policies like these are essential to give employers the incentive they need to take good care of their employees.

2. YOUR CONTRIBUTIONS ARE DEDUCTIBLE

Most carriers require employers to pay half of their employees’ premiums (but there’s no requirement for paying any dependent premiums). When you pay part of your team’s premiums, it unlocks another big tax benefit. You see, paying part of your team’s premium is a generous act that also doubles as a business expense. When filing your taxes, that means you can write off those premiums as a deduction.

The premiums you pay are also a tax-free benefit for your employees. According to the IRS, if an employer covers health insurance costs for employees (plus their spouses and dependents), the employer’s payments are not considered wages. Therefore, they’re not subject to Social Security, Medicare, FUTA taxes, or federal income tax withholding.

3. POP PLANS CAN HELP YOU SAVE EVEN MORE

A premium-only plan (POP) opens the door to extra tax savings. POP plans (which are also known as basic cafeteria plans) come from IRS Section 125. They let your employees pay for their share of their health insurance premiums with pre-tax dollars, which means that both you and your team pay less in taxes.  

Your broker typically sets up your POP plan when they enroll you in your benefits plan. Here’s an example of how the savings works for your business:

Payroll tax deductions from health insurance

If your organization has ten employees who each make $40,000 a year, a POP plan can help you save $2,460 a year.* At the same time, one of those employees who earns $4000 a month could wind up with an extra $972 a year of net pay:**

Employee tax savings from health insurance

 

4. YOU PAY FEWER PAYROLL TAXES

If you offer a cafeteria plan, the size of your payroll gets smaller in the eyes of Uncle Sam because the pre-tax premiums employees pay for health insurance aren’t counted as income, which reduces your payroll. Only the taxable wages they are paid count toward your tax burden. A smaller payroll means less payroll tax.

(Drops the mic.)

BONUS: YOU GET WORKERS’ COMP SAVINGS, TOO

Your workers’ comp premiums are based on the size of your payroll, too. When employees pay for health insurance premiums with pre-tax dollars, that means workers’ comp premiums decrease as well.

So what are you waiting for?

When you look at the big picture, there are lots of reasons offering health insurance is a healthy choice. Not only does it empower your team to take control of themselves, but you’ll also sweep up a ton of tax breaks while doing so. Review the benefits above, and take comfort in knowing that when tax time comes around, some of your money can sail right back your way.

*Based on 6.2% Social Security and 1.45% Medicare taxes, no state taxes included.

**Based on 25% federal income and 6% state income taxes.