11th Hour Series: Medical Plan Strategies
All small-business owners with one to 49 employees should have a medical plan for their business.
As you likely know, when you have 49 or fewer employees, the tax law does not require you to have a medical plan for employees, but you should. And here is why!
Most of the tax rules that apply to medical plans are straightforward when you have fewer than 50 employees.
And then, when you have your spouse (if applicable) as your only employee in a proprietorship. There’s that great rule that enables the 105-HRA family medical plan that’s exempt from the Affordable Care Act. (this will be explained later.)
Here are 6 medical plan strategies for you to consider. There may be some big tax credit and incentives you are missing out on.
The Forest for the trees
1. Claim the Coronavirus Sick and Family Leave Tax Credits
Tax credits give you a dollar-for-dollar tax benefit.
You likely have some tax credit money from the sick and family leave tax credits due to covid. (if applicable)
Here is an example of the type of money we are talking about. If you are self-employed with no employees, your tax credits can add up to $33,022 in sick and family leave refundable tax credits. That is $15,511 with your 2020 tax return and $17,511 with your 2021 tax return. (Now, that’s what I’m talking about!)
If you operate as a corporation, your corporation also qualifies for the sick and family leave credits, and the tax credit can be huge!.
It’s likely you made some or all of these payments without knowing it. That could mean amended tax returns for 2020 and cash infusions for your business.
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 on December 31 so they qualify as business deductions this year. This will allow you to earn more tax credit this year.
3. Reimburse QSEHRAs before December 31
The 2021 Qualified Self Employer Health Reimbursement Arrangement (QSEHRA- for short) limits on rself-only coverage and $10,700 for family coverage.
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.
Now that’s what I call a win-win for you and your employees!
4. Reimburse ICHRAs before December 31
Additionally, as of 2020, there’s a new health plan option available for employers of all sizes: the Individual Coverage HRA. (the Government really loves their acronyms!)
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 through group coverage.
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 two requirements before December 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.
You still have time to get your S corporation health insurance on both the corporate books and your W-2, but don’t put this off—time is running out.
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. This means either a limited or no deduction for your health insurance.
6. Claim the Health Insurance Tax Credit
Do you now provide health insurance as a fringe benefit to your employees? If so, you may be eligible for the tax credits.
If you are an Affordable Care Act–defined small employer and you are about to cover your employees with group health insurance, you can claim a tax credit of 50 percent in tax years 2021 and 2022 (limited to two consecutive tax years).
To qualify for the credit with your group health insurance plan, you must cover at least 50 percent of the cost of single (employee only) health care coverage for each of your employees.
Depending on the number of employees you have, their salaries and how much of their health insurance you cover, the law phases out part of your credit (sorry!)
You may not claim the credit on health coverage you give to yourself, your spouse, or other specified relatives.
Now the trees for the forest:
- If you earned the credit but failed to claim it in 2018, 2019, or 2020, file an amended return now.
- If you plan on providing health insurance for your employees and you have not yet done so, you need to hurry so you can earn that 50 percent credit this year. On the other hand, you might want to start in 2022 so you have a full year of payments eligible for the credit.
Something of note: The 50 percent tax credit is huge—that’s a great incentive. But group health insurance is expensive, and you get the subsidies for two years only. After that, you’re on your own, and your cost of group health insurance likely will continue to increase.