Q: How Do Employer Health Insurance Contributions Work?

Employer contributions help spread out the cost of health insurance between employees and employers so it’s easier for both sides to handle.

Employers choose a health insurance plan and then determine the amount they’ll cover—for instance, 75%. Your employees will be responsible for the plan’s remaining costs.

What does the Affordable Care Act require?

The Affordable Care Act (ACA) states that employers with 50 or more employees need to offer health plans that meet the minimum value standard. This means employers have to provide health insurance that’s economical, comprehensive, and covers (on average) at least 60 percent of their employees’ medical care.

Plans also have to “substantially” cover physician and inpatient hospital services.

A plan with minimum essential coverage, or a “qualified health plan,” meets all ACA requirements—including covering essential health benefits and following limits on cost-sharing. Learn more about minimum essential coverage here.  

What percentage of health insurance do employers have to pay?

As an employer, the amount you have to contribute to your employees’ group health plan varies by insurance carrier. Insurance carriers generally require that companies contribute to at least half of employee premiums. A few states, like New York, allow you to contribute whatever you would like, going as low as 0 percent contribution. Be sure to check your state laws.

Despite that rule, many employers decide to take care of even more of the cost. However, remember that contributing extra is totally up to you.

bar chart from Kaiser study
Source: 2020 Kaiser Family Foundation Annual Health Benefits Survey, figure 6.7, p.85

The Kaiser Family Foundation found that in 2020, 90% of covered employees have a plan in which the employer contributes at least 50% percent toward premiums for single and family health insurance coverage.

You may be able to contribute 100 percent towards your employees’ group health plan, but the implications of that decision vary by insurance carrier. Some carriers say that if you contribute 100 percent, you also have to have 100 percent enrollment in the plan. Some carriers don’t have that stipulation.

When it comes to contributions, it’s important to consult with your broker so that you follow all regulations and also pick an amount that is right for your business.

What does an employer contribution look like?

Imagine that Jillian is one of your employees at your toy store. She has a gold HMO, and her premium costs $250 a month. This is how one situation could play out:

  • Monthly health premium for Jillian: $250
  • Your toy store pays: $220 (88%)
  • Jillian pays: $30 (12%)

That means that for each pay period, Jillian will have $30 subtracted pre-tax for her health premium.

Let’s say you have four employees on your team. Your company pays a chunk of the insurance bill for the entire team each month:

  • Monthly premium for Jillian, Jack, Joe, and Jerrold: $1,000
  • Your toy store pays: $880 collectively (88%)
  • Jillian, Jack, Joe, and Jerrold each pay: $30 (12%)

Keep in mind, if Jack has a higher premium than Joe—for example, if he’s older or a smoker and your insurer prices policies individually—the exact costs would adjust slightly based on the percentage you chose to contribute.

How are contributions to health insurance premiums taxed?

Money that an employer spends on their employees’ health insurance premiums is not considered wages and is exempt from federal income tax and payroll taxes. (Fine print: S corp employees who own more than 2% of the company will have health insurance benefits included in their federal wage calculations. Always check with your CPA!)

Small businesses with fewer than 25 employees with an average employee salary of less than $50,000 (adjusted for inflation) per year may also be eligible for a federal tax credit. They must share at least 50% of the cost of health insurance premiums for a qualified health plan offered from the Small Business Health Options Program (SHOP) Marketplace and SHOP coverage must offered to all full time employees. In some cases, money paid towards employee wellness programs can also be included in the calculation for a credit. Head over to the IRS website for details and requirements before filling out IRS Form 8941: Credit for Small Business Health Insurance Premiums. Also, be sure to read the Form 8941 instructions for important fine print—e.g. there are exceptions for employers in some counties and a waiver for Hawaii that prevents small businesses in Hawaii from claiming a credit for health plans after 2016. 

For small businesses that are tax exempt, the maximum credit is 35% of employer funds paid towards qualified employee healthcare premiums—and the credit can be claimed on Form 990-T. For non-tax exempt small businesses, the maximum credit that can be claimed is 50% of employer funds paid towards qualified employee healthcare premiums. The credit usually gets claimed on Form 3800 as a general business credit and offsets regular and/or alternative minimum tax. And what if your small business didn’t make a profit this year? The credit can typically be rolled forward to the next year, or result in a refund.

Some states also offer a deduction or credit. Check your state laws for details.

What about QSEHRA contributions?

Great question! A Qualified Small Employer Employer Health Reimbursement Arrangement (QSEHRA) is an arrangement in which an employer reimburses an employee for qualified health care expenses. It’s not insurance per se—it’s a reimbursement arrangement—and the good news is that reimbursements are typically tax-free at the federal level. Check out our QSEHRA post for more details about how it works, contributions, and taxes.

This post was originally published on November 15, 2016.

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