We’re covering everything you need to know about providing health insurance as a small business owner amidst a global pandemic in 2021.

The only thing more expensive than the cost of healthcare these days is… not having it.

In 2021, as we continue to ride out a global pandemic, none of us can afford to be without health insurance. 

In fact, as of this year, the state of California makes it a crime to not carry it.

Which is probably why healthcare is the number one perk that employees value, according to this 2020 study.

However, as business owners—we get it.

As much as we’d love to provide the most comprehensive coverage for all of our employees, it’s not always feasible with the constant rise in prices and skinny business margins.

Today, we’re going to cover the facts of providing healthcare coverage through your business, the most cost-effective plans to research, and dive into a few of the tax benefits you’ll receive.

Let’s jump in.

Facts You Need To Know

First things first, let’s answer a few burning questions up front.

Is it required to provide health insurance as an employer?

No. Under the Employer Mandate, the Affordable Care Act requires that only businesses with 50 full-time employees (FTE) or more have to provide health insurance. This means if you average less than 50 full-time employees per year, you are not required by law to provide coverage for your employees. If you’re unsure how to calculate FTEs, you can use the calculator here.

But should I provide health insurance to my employees?

While providing health coverage for employees isn’t required by law for all businesses, it’s still a popular thing to do among employers. In fact, almost 60% of small firms offer health benefits to at least some of their workers, for an overall offer rate of 57%. Having a competitive benefits package goes a long way in recruiting and maintaining top talent in a tight job market. 

Can my employees or I live without it?

It depends on the state. In a state like California, every resident and member of their household (unless they meet an exception) is legally required to carry health insurance. The penalty for not having coverage is hefty—costing up to 2.5% of the household income in some cases. This is another reason why businesses in California opt for some type of employer-led healthcare plan more often than not.

Why You Should Consider Providing Healthcare As A Business Owner (Hint: Tax Benefits!)

While the decision to offer health insurance as a small business owner with under 50 employees is completely up to you, there are a few reasons why it may be a good idea to do so.

Depending on your business entity, there are desirable tax savings to gain when providing health insurance through your business.

Health Insurance For Sole Proprietorship

When operating as a sole proprietor, health insurance can be a daunting expense to consider.

But it doesn’t have to be.

In fact, it’s often better to carry health insurance through your company for the tax advantages.

As a sole proprietor, you are allowed to reduce your adjusted gross income (AGI) by the cost of health insurance premiums paid for by you and your family, and we recommend doing so.

This will usually result in a higher tax deduction than simply claiming it on your itemized deduction—subject to 7.5% of your adjusted gross income.

Use your sole proprietorship to capitalize on these tax savings for you and your family.

Health Insurance for S-corporations

As an S-corporation owner, you are able to carry health insurance through the business by buying a group health plan for yourself and employees.

In this case, the business will receive the tax write off.

However, there’s an important catch to note.

If you own 2% or more of the S-corp, any fringe benefits you receive from the business are treated as additional compensation to you.

In some cases, this will make your personal income tax bracket go up.

A tip we like to share with clients who are married and own more than 2% of their S-corporation (mostly all!) is to hire your wife into the business, and receive the health insurance benefits through her.

If you have questions about how this works, you can schedule a call with us anytime. We’re happy to help.

Health Insurance for C-corporations

Moving on to C-corporations.

If you run your business as a C-Corp, you can participate in what’s known as a Section 105 Plan and receive all reimbursements 100% tax-free. 

This is a huge tax savings, especially for individuals with special needs children, or those with high medical or dental expenses.

Under Section 105, you’re allowed to reimburse yourself for qualified health care expenses as well as family member expenses.

Additionally, you don’t have to pay taxes on the expenses you reimburse employees for.

When running a C-corp, the tax strategy around health insurance can become quite complex, which is why we recommend seeking out a qualified professional to help.

Two Cost-Effective Options for Healthcare Plans

When it comes to the most cost-effective healthcare plans for your business, there are a few routes you can go down.

QSEHRA

As a popular alternative to traditional group medical plans, you can offer employees a Qualified Small Employer Health Reimbursement Arrangement.

QSEHRA allows business owners to reimburse employees for their medical expenses from a tax free healthcare allowance. 

This is a great option for small business owners who are not mandated to provide health insurance, but want to keep employees happy.

It allows you to set allowance caps in line with your budget, effectively gaining complete control over the costs, while still providing coverage as a benefit.

It’s a great option for many small businesses and one we strongly recommend looking into.

Health Savings Account (HSA)

Another great healthcare option to have as a business owner is the Health Savings Account, or HSA. 

It’s important to note that Health Savings Accounts are a complement to your existing health insurance, not a substitute.

If you have a high deductible health insurance, you’re eligible to open a Health Savings Account (HSA) as an additional savings tool for out of pocket expenses.

As a business owner, you can fund the account from the business, and/or allow employees to participate in the plan.

Individual taxpayers can contribute up to $3,600 a year ($7,200 for families) and contributions are tax deductible.

Additionally, distributions are tax-free if used to pay for qualified medical expenses.

Okay. So, You Recommend Providing a Health Plan in 2021?

Yes, we do!

Global pandemic and changes in state law aside, there are many good reasons why you should consider providing healthcare as a benefit in your business.

As mentioned previously, healthcare plans help keep employees happy and help with employee retention.

Remember: it’s much more expensive to hire an employee than to retain one.

Additionally, having a great healthcare package can help attract new employees to your company. If you’re like most of our clients, it’s a tight job market at the moment and offering a comprehensive health plan can certainly help with recruitment.

Secondly, providing health insurance to your employees can boost productivity. We all know that healthcare costs are out of control even when you have insurance, so imagine the constant worry and stress that’s caused for Americans who live without it. 

Employees with health insurance have one less burden to carry, and are less likely to call out sick due to burn out or stress-induced illness.

Finally, offering health insurance through your business creates savings opportunities for you at tax time.

Providing health insurance can benefit you, your family, and employees as contributions are tax deductible.

As a business, you may even qualify for a small business healthcare tax credit at the end of year.

In our books, it’s a win-win.

If you need help navigating the complexities of healthcare plans & the tax advantages for your business, you can reach out to us with a question or comment any time. Simply email us directly or schedule some time on the calendar. We’re always here to help.

Until next time.