If your business has less than 50 employees, it is a good idea to have a medical plan of some sort in place in your business. Most of the tax rules that apply to medical plans are straight forward when you have fewer than 50 employees.
We will describe 6 opportunities below that many of you may qualify for.
Strategy 1 – Claim the Coronavirus Sick ad Family Leave Tax Credits
Tax credits are the best as they give you a dollar-for-dollar tax benefit.
If you did not obtain a PPP loan, then you should make sure to claim the federal tax credit equal to 100% of required emergency sick leave and emergency family leave payments made pursuant to FFCRA (Families First Coronavirus Relief Act).
And while you’re at it, make sure you obtain the employee retention tax credit too.
Strategy 2 – Reimburse 105 Expenses Now
If you previously put your Section 105 medical reimbursement plan in place, make sure the reimbursements take place before midnight so they qualify as business deductions this year.
See my article later this week on how Health Reimbursement Arrangements work.
Strategy 3 – Reimburse QSEHRA’s before December 31
If the spouse-only 105 HRA doesn’t work for you, and you have less than 50 employees, the QSEHRA is a good option.
If you don’t have your 2020 plan in place and you want a January 1 start date, the IRS can assess a penalty of $50 per employee for your failure to give written notice to employees at least 90 days prior to the start of the QSEHRA.. That said, you may want to go ahead and implement anyway. $50 per employee is not much and the IRS has to audit , find the problem and assess the penalty. Your odds of non-detection are good.
A QSEHRA allows reimbursements for individually purchased health insurance and out-of-pocket medical expenses of up to $5250 for self-only coverage and up to $10,600 for family coverage (2020 coverages).
The QSEHRA is a winning compensation strategy for the small business owner:
- You deduct the reimbursements as a business expense and don’t owe payroll taxes on the reimbursements.
- Your employees pay neither income taxes nor payroll taxes on the reimbursements.
Strategy 4 – Reimburse ICHRAs before December 31
There is a new health plan option that came available starting in 2020 for employers of all sizes; The Individual Coverage HRA. An ICHRA allows you to reimburse employees for both premiums and other medical expenses, and it requires employees to be covered by individual health plans (from the marketplace or elsewhere) rather than group coverage.
Strategy 5 – Comply with S Corporation Rules for Health Insurance Deduction
If you are the owner of an S Corporation, make sure you comply with these 2 requirements before Dec. 31
- The S corporation has either paid for your health insurance or reimbursed you for the cost of the insurance.
- The S corporation includes the cost of your health insurance on your W2.
If you, the owner-employee of your S Corporation, don’t run your health insurance premiums through your S Corporation, you get no above-the-line deduction on your Form 1040. Instead you deduct the insurance as an itemized deduction subject to the 7.5% of adjusted gross income floor, which can mean a limited deduction or no deduction or your health insurance.
Strategy 6 – Claim the Health Insurance Tax Credit
If you provide health insurance as a fringe benefit to your employees, you may be eligible for the Health Insurance Tax Credit.
If you are an Affordable Care Act-defined small employer and you cover your employees with group health insurance, you can claim a tax credit of 50% in tax years 2020 and 2021 (limited to two consecutive tax years).
To qualify for the credit with your group health insurance plan, you must cover at least 50% of the cost of single health care coverage for each of your employees.
You earn full credit when you have 10 or fewer full-time equivalent employees and those employees have average full-time equivalent wages of less than $25,000. If you have more employees or the average earnings are higher, the tax law phases out part or all of the credit.
You cannot claim the credit on health coverage you give to yourself, your spouse or other specified relatives.
As I write this article, it is apparent that the last couple of years, along with Covid laws, have changed the health care options for employers drastically. Look for a review of new rules in this blog before the end of the year. Many small employers may want to make some changes in the new year.
AFS is the small business specialist. Look to us for help in small business health care tax planning as well as all other business taxes. We are also a small business and understand small business needs.