Educating Employers on the Tax Advantages of Offering Group Health Insurance

In your work with employers, it’s important to discuss the substantial tax advantages available to businesses when they offer health insurance benefits to employees. Not only can these benefits help attract and retain top talent, but they also provide significant financial incentives, such as deductions on premiums and potential credits, that can improve the overall financial health of the company. By understanding and leveraging these advantages, employers can make more informed decisions that benefit both their employees and their bottom line.

Here are a few things you might consider including in your conversations.

Premium Contribution Deduction

As a general rule, most employers can deduct 100% of the cost of premiums paid for employees’ health insurance and/or their dependents from both federal and state business income taxes.

Depending on your client’s group size, his or her small business may be eligible for health insurance through the Covered California state exchange, established by the Affordable Care Act (ACA). However, there are limits to the Premium Tax Credit for coverage available through Covered California for Small Business.

The tax credit available works on a sliding scale, and it is offered only to businesses with 25 or fewer employees that employ workers with a lower annual average wage. Additional details on qualification are available on the Tax Credits page of the Covered California website.

For-profit employers are limited to a maximum tax credit of 50% of the premium expense for employees’ coverage. Non-profit/tax-exempt employers are limited to 35% tax credit. The tax credit applies to two consecutive tax years, and is only available for coverage purchased through Covered California.

In contrast, as mentioned above, businesses purchasing coverage through a broker who represents an insurer or a private exchange like CaliforniaChoice, are generally able to deduct 100% of the cost of premiums paid for employees’ health insurance on business’s federal and state income taxes. And, best of all, these deductions can be taken year after year for as long as coverage is maintained (subject to changes in federal and state tax laws).

Section 125/POP Advantages

If your clients offer their employees a Premium Only Plan (POP), they can reduce their business’s payroll taxes and give employees the ability to pay their share of health insurance premiums on a pre-tax basis. (As a Word & Brown broker, you can offer your qualifying groups access to a Premium Only Plan at no cost during the first year. Ask your Word & Brown representative for details.)

A POP also offer tax advantages to employees with a High Deductible Health Plan (HDHP), because it reduces taxes on Health Savings Account (HSA) contributions. Employers can usually deduct HSA contributions (made on behalf of employees) from their small business’s taxes, too.

Other Potential Tax Savings

If your clients offer paid medical leave to their employee, they could be eligible for a tax credit ranging from 12.5% to 25%. Under the Consolidated Appropriations Act of 2021, a business offering medical leave meeting certain requirements can take a general business tax credit starting this year and continuing through 2025. The new allowance applies to family and medical leave of up to 12 weeks per taxable year. Additional information is available on the Mercer website.

A Valued Employee Benefit

It’s also worth reminding your clients that – year after year – employee surveys reflect how much employees value benefits offered through their employer. A Glassdoor survey found more than half of employees (57%) saying benefits are a key factor in deciding whether to pursue a particular job. As far as health insurance specifically, the latest MetLife’s Annual U.S. Employee Benefit Trends Study, published earlier this year, found 85% of employees put health insurance at the top of their benefits list.

For your clients with a handful or even a dozen employees, adding (or maintaining) employee benefits could seem like a costly proposition. However, the potential costs of losing an existing, high-value employee really adds up. estimates replacing an employee can run into thousands of dollars – perhaps totaling as much as 20% of an employee’s salary.

You can help your clients by working with them to find coverage that balances their employees’ need for health insurance and your client’s need to control business costs. Word & Brown’s WBQuote and WBQuote Lite software make it easy to compare plans side by side. Plus, our integrated provider search helps you ensure your clients’ preferred doctors and hospitals are part of the plans they’re considering.

Call or email your Word & Brown representative or contact any of our six regional offices in California and Nevada for quote, presentation, or enrollment assistance – or for service after the sale.

Note: This article is not provided as tax advice for employers; your clients should consult a tax professional concerning their specific business and circumstances. The educational information presented is based on research using the best resources available at the time of publication; it is subject to potential change.


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