All small-business owners with one to 49 employees should have a medical plan in their business.
Sure, the tax law does not require you to have a plan, but you should.
Most of the tax rules that apply to medical plans are straightforward when you have fewer than 50 employees.
And then there’s a great rule if you have your spouse as your only employee in a proprietorship.
Take a few minutes to review the six medical plan strategies in this article. You could find some big money sitting on the table waiting for you.
Here are the six opportunities we will explain in this article:
- Claim the federal tax credit equal to 100 percent of required emergency sick leave and emergency family leave payments made pursuant to the Families First Coronavirus Response Act (FFCRA).
- Reimburse your 2020 Section 105 or other health reimbursement account (HRA) medical expenses now.
- Reimburse your Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).
- Reimburse your Individual Coverage Health Reimbursement Arrangement (ICHRA).
- Ensure that you take your S corporation health insurance deduction correctly.
- Claim the tax credit for the health insurance you give your employees.
- Claim the Coronavirus Sick and Family Leave Tax Credits
Tax credits are the best. They give you a dollar-for-dollar tax benefit.
If you did not obtain a Payroll Protection Program (PPP) loan, then you should make sure to claim the federal tax credit equal to 100 percent of required emergency sick leave and emergency family leave payments made pursuant to the FFCRA.
And as long as you are doing that, make sure to obtain the employee retention tax credit too.
For how these two credits work to your benefit, see COVID-19: Significant Payroll and Self-Employment Tax Relief.
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.
For how the 105 medical reimbursement works best, see Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement).
Reimburse QSEHRAs before December 31
As you know from being a subscriber (member), if the spouse-only 105-HRA will not work for you and you have fewer than 50 employees, the QSEHRA is a good option.
The 2020 QSEHRA limits on reimbursements for individually purchased health insurance and out-of-pocket medical expenses are $5,250 for self-only coverage and $10,600 for family coverage.
If you don’t have your 2020 plan in place and you want a January 1 start date, the IRS can assess a penalty of $50per employee for your failure to give written notice to employees at least 90 days prior to the start of the QSEHRA.
(If you want to give your employees the QSEHRA benefit on January 1 and you face the $50-per-employeepenalty, bite the bullet and do it. First, $50 is not much. Second, the IRS has to audit, find the problem, and then assess the penalty—your odds of non-detection are good.)
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.
- Review Avoid Penalties—Give Notice of 2019 HRA Medical Plan on Oct. 2 for more information on how the QSEHRA works.
Reimburse ICHRAs before December 31
Additionally, there’s a new health plan option available starting in 2020 for employers of all sizes: the Individual Coverage HRA. 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 group coverage.
To brush up on the ICHRA rules, see New Individual Coverage HRA Turns the Clock Back to Pre-ACA Health Care Options.
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 percent of adjusted gross income floor, which can mean either a limited or no deduction for your health insurance.
We go over this and additional issues you need to consider in Update: 2018 Health Insurance for S Corporation Owners. The rules in this 2018 update article apply to 2020 without change.
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 we first described in How You, the Small-Business Owner, Can Cash In with Tax Credits for Health Insurance on Employees.
For updates to the original article, go to the IRS webpage Small Business Health Care Tax Credit: Questions and Answers.
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 2020 and 2021 (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 health care coverage for each of your employees.
You earn full credit when you have 10 or fewer full-time-equivalent employees and those employees have average annual full-time-equivalent wages of less than $25,000. If you have more employees and/or the earnings are higher, then the tax law phases out part or all of the credit.
You may not claim the credit on health coverage you give to yourself, your spouse, or other specified relatives.
This is only the big picture, of course, but here are some planning thoughts:
- If you earned the credit but failed to claim it in 2017, 2018, or 2019, 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 2021 so you have a full year of payments eligible for the credit.
- 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.
Here are the six medical plan insights from this article:
If you did not obtain a PPP loan, then you should make sure to claim the federal tax credit equal to100 percent of required emergency sick leave and emergency family leave payments made pursuant to the FFCRA. And as long as you are doing that, make sure to obtain the employee retention tax credit too.
- If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2020 deductions, and then put yourself on a monthly reimbursement schedule in 2021.
- If you want to but have not implemented your QSEHRA, make sure to get that done properly now. You are late, so you could suffer that $50-per-employee penalty should you be found out.
- But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, be sure to consider the ICHRA. It’s got more advantages.
- If you operate your business as an S corporation and you want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance, and (b) put it on your W-2. Make sure that the reimbursement happens before December 31 and that you have the reimbursement set up to show on the W-2.
- Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2020 and possibly in prior years.