Can You Afford to Offer Health Insurance?
Massachusetts recently passed and sent to its governor legislation making health insurance mandatory for every resident. One controversial provision would fine any business that failed to provide health insurance $295 a year for each employee. The plan aims to make both individuals and businesses more responsible for covering the state’s citizens.
Massachusetts officials are confident they can bring down the cost of insurance by adding to the number of people in the insurance pool and by allowing insurers to offer less expensive plans with less extensive coverage. The state’s universal health-care plan also calls for combining the markets for small businesses and individuals, a move state lawmakers say should lower the cost of individual policies by nearly 25 percent.
The good news for many tennis businesses is that while Massachusetts’ goal is to expand coverage to an additional 515,000 of the state’s 6.4 million residents during the next three years, it sidesteps some smaller employers, generally those with 10 or fewer employees. The bad news is that an increasing number of states — 23 at last count — are also considering bills that would force employers to provide some health insurance coverage for workers or pay a penalty.
While there are loopholes, exemptions, and a great deal of controversy connected with this bold universal health-care initiative, it raises an interesting question: Can your facility or shop afford to offer health insurance to employees?
Insuring the masses
Soaring premiums have placed health insurance in the category of a luxury that an estimated 43 million individuals cannot afford. Health insurance is also rapidly becoming far too expensive for many large employers. What chance does the average tennis business have of being able to afford coverage for its employees, let alone its owner?
According to a recent survey by the non-profit Kaiser Family Foundation, small businesses (defined as those with three to 199 employees) experienced a 9.8 percent increase in health insurance premiums in 2005. The average small business now pays $4,032 a year for individual coverage and $10,584 for a family.
Facing competition with larger businesses in attracting workers, small business owners may, according to many experts, be better off finding ways to reduce the cost of health-care insurance rather than not offering it. In many cases, you can lower premiums by increasing deductible levels or raising the co-payment amounts for certain services, such as office visits and prescription drugs. Another key to affordability is to shop around from carrier to carrier. Another is to share the cost with employees.
And, don’t forget that the tax deduction for “self-employed” facility operators and retail shop owners is 100 percent of the cost (for themselves, spouses, and dependents) subtracted from adjusted gross income. The deduction is limited to the operator’s net annual income derived from that self-employment, minus the deduction for 50 percent of the self-employment tax and/or the deduction for contributions to Keogh, self-employed SEP or SIMPLE plans.
The biggest savings, though, often result from “high-deductible” health insurance plans. On average, premiums decrease by 10 percent to 30 percent when the deductible jumps from $500 to $2,000, according to Emily Fox, spokesperson for eHealthInsurance.com, an online insurance referral service.
HSA and MSA
Although a high-deductible plan can be difficult for many employees to stomach, a business offering to contribute part of the money saved on premiums into a Health Savings Account (HSA) for each worker can help ease the financial burden. The IRS allows both employers and individuals to set aside pre-tax dollars into an HSA to help pay for out-of-pocket medical expenses, including those steep deductibles. Contributions made to such plans by an employer are, of course, tax deductible.
Much like IRAs, pre-tax contributions to an HSA are limited. In 2005, HSA contributions couldn’t exceed the lesser of the annual deductible or $2,650 for self-coverage or $5,250 for families. Distributions or withdrawals from HSA accounts that are not used to pay medical expenses must be included in income and are subject to a 10 percent penalty. With an HSA, however, any money that is not used in a given year can be rolled over into the next for future medical expenses.
Employees of small businesses as well as those who are self-employed also can take advantage of Archer Medical Savings Accounts (MSAs) to pay health care expenses — provided, of course, that accounts are held in conjunction with high deductible health insurance. Archer MSAs, similar to IRAs, are created solely to defray un-reimbursed health-care expenses. Contributions to MSAs are made with pre-tax dollars and distributions are not included in gross income if used to pay for qualified medical expenses.
Who is an employee of whom?
Contributions by an employer to provide accident and health benefits are not taxable to the employee. The employer’s contributions are, of course, deductible.
When it comes to health insurance or any fringe benefit paid to employees of a business operating as an S corporation, the tax treatment is different for employee-shareholders than for other employees. Fringe benefits paid to S corporation employees who are not shareholders, or who own 2 percent or less of the outstanding S corporation stock, are tax-free. However, an owner-employee who owns more than 2 percent of the S corp stock can deduct 100 percent of the amount paid for medical insurance for him, his spouse, and dependents.
The payment of premiums by a partnership for a partner’s health or accident insurance is generally deductible by the partnership and included in the partner’s gross income. The partner can deduct 100 percent of the cost of health insurance premiums paid on his or her behalf.
Medical reimbursement plans
The IRS allows small businesses to reimburse their employees for medical expenses. The business sets the amount of money it is willing to lay out every year and the employee then goes out and purchases health insurance on the individual market.
Payments from these Medical Reimbursement Plans are tax-free for the employee and tax deductible for the business. One of the nicest features is that it allows employers to offer some type of medical benefit without the headaches of worrying about rising premiums.
But ever-rising health insurance costs remain an important consideration for both business owners and employees. Fortunately for businesses, health insurance is not yet mandatory. However, the Massachusetts plan and universal coverage plans under consideration in other states may be an indication of things to come.
There’s no better time to investigate health-care insurance, options for your employees, and the tax deductions that just might help make it affordable for your business.
See all articles by Mark E. Battersby
About the Author
Mark E. Battersby is a tax advisor and author in Ardmore, Pa.
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