Understanding the relationship between health insurance, taxes, subsidies, and employer benefits

There is more to the cost of health insurance than just the price. Many complex factors such as taxes, subsidies, and money provided by an employer can impact your health insurance scenario. Mike Dietz owner of MIB Health Insurance says, “If you like to pay taxes as much as you like to pay health insurance premiums, read no further.”

MIB Health Insurance has tools to help save on taxes and health insurance premiums. The relationship between health insurance and taxes can be difficult to understand leading employees and employers to often overpay for health insurance. The experts at MIB Health Insurance can help you sort through your best health insurance options including a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) which can save the company and employees money on their health insurance premiums, and options for health insurance and marketplace subsidies.

If you look at this chart you will see there are three ways an employer can offer benefits to employees. From the employee viewpoint, Method One is the most expensive at $428.59, Method Two is better with a cost of $139, and Method Three is the best option with the lowest cost at $2.20.

Meet Steve.

Steve is the owner of a small manufacturing company and does not offer health insurance benefits to his employees. Steve pays a few employees $400 a month more on their paychecks to help compensate for their health insurance. According to the chart, Steve is following Method One for his employees. We can see that Steve and his employees may be paying more in taxes than necessary.

A QSEHRA allows the employer and employee to pay for their health insurance premiums pre-tax. Method Two in the chart illustrates how this works. The employees save $289.59 a month and the employer $41.23 In taxes per month if they choose to set up a QSEHRA plan. Think about the savings potential. Method Two results in $3,969.84 in annual tax savings for just one employee!

When a QSEHRA is set up correctly, it will allow the employee to take the benefit from the employer as taxable income and benefit from a subsidy on the marketplace. This option is shown as Method Three in the chart. An employee cannot double dip by taking pretax money from the employer and the subsidy, but they can take the benefit as taxable income and use the subsidy. The QSEHRA saves the FICA taxes on the benefit which is still 15.3% savings.

Meet Kathy and Julie.

Kathy and Julie work for Steve and are both 50 years old. Kathy earns $50,000 per year and Julie’s annual salary is $80,000 a year. Both women are in the 34.95% tax bracket comprised of 22% federal tax, 5.3% state tax, and 7.65% FICA tax. They both have health insurance plans with a monthly premium of $539. Kathy is eligible for a marketplace subsidy which can lower her monthly cost by $246. Julie does not qualify for a subsidy with the marketplace based on her income.

Method One is the most expensive way to buy health insurance. It often seems to be the easiest option for an employer to administer which is why a lot of employers choose this approach.

Kathy is fine taking the $400 as taxable income from Steve because she also receives a $246 subsidy from the marketplace. In reality, Kathy and Steve are both overpaying FICA taxes by 7.65%. If Steve sets up a QSEHRA plan, they will both save money.
Julie is paying an extra $289.59 a month in taxes compared to if she was able to pay pretax using a QSEHRA.

MIB Health Insurance makes setting up and administering a QSEHRA simple for both employers and employees. The QSEHRA experts at MIB analyze each unique situation and can customize the benefit to employers to maximize cost savings and offer flexibility to employees to realize tax savings and marketplace subsidies. Employees like Kathy and Julie can save money and employers like Steve can offer more benefits and receive tax savings.

Methods Two and Three

Methods Two and Three require an employer to have a written plan document to accompany their QSEHRA with the employer to get the plan documents set up to meet their needs and maximize tax savings. A summary document will explain the benefits to employees. Assistance for employees to evaluate insurance options and complete the enrollments is a huge benefit. Once employees are enrolled, they do not need to hassle with sending in proof of coverage, MIB Health Insurance does all the work. The employer receives a monthly invoice with instructions. This invoice clarifies which employees are documented after tax deductions like Kathy and which should be managed pretax like Julie. Each year upon renewal, MIB helps employees update or adjust plans and provide updated invoices for the employer to be ready for January payroll deductions.

MIB Health Insurance also helps employers and owners understand the best options available to help them maximize benefits for employees while offering the best tax savings for the company. For example, there are different rules about deductions for 2% or greater S-Corporation owners. Most owners want the company to pay for their health insurance. But this can get complicated depending on how your accountant records names, costs, and deductions. Some accountants may not fully understand the complexities of the impact of health insurance on taxes. Always check with your accountant to determine the best practices for recording your health insurance for tax purposes. They know your finances better than anyone else. MIB is always available to consult with you and your tax provider to ensure that your health insurance costs are being handled correctly on your tax return.

MIB Health Insurance is a family-owned company with a team of caring health insurance professionals in the Fox Cities who want to understand your unique health insurance story. Whether you are an employer, employee, or individual, together we can find the right health insurance solutions for you and your family. The health insurance experts at MIB are committed to providing peace of mind when protecting you and your family. Call a MIB Health Insurance expert at 920-731-2100 to see how health insurance costs may influence your tax scenario.