The Tax Benefits of Health Insurance and Fringe Benefits

The impact of the Affordable Care Act on small and mega businesses has yet to fully play out, but very small businesses (fewer than 50 employees) don’t have to worry about the requirement to provide health insurance benefits. But that doesn’t mean these owners aren’t providing coverage.

There are still tax write offs for providing health insurance, but with the Health Coverage Tax Credit (HCTC) no longer available, the incentive has declined.

It’s no secret that providing health insurance is expensive, making , many small businesses choose not provide benefits, letting their employees deal with securing individual plans.

But that might not be the best business choice, here’s why:

  1. Providing coverage is expensive, but you are making it known to your employees that they have value. I’ve often heard employees say, “The job doesn’t pay much, but the benefits are great,” and there’s a sense of pride in their voice.  Employees feel they are being rewarded above and beyond their regular pay. This promotes loyalty and a stronger work ethic.
  2. Most employee benefits are tax deductible and not subject to the employer share of payroll taxes. This means as a business owner, you will save money, not spend money by providing benefits. For every $100 of benefits provided, the business will save at least $7.65, the equivalent of the matching Social Security and Medicare required by the employer.
  3. Just because the HCTC expired at the end of 2013 doesn’t mean it is dead. Every year tax provisions expire and then sometime during the year Congress revives them and makes them retroactive to the beginning of the year. According to my sources, Congress will take a look at all 55 expiring tax provisions in the fourth quarter. Many of them will fly again.

When it comes time to give an employee a raise, consider making it in the form of a fringe benefit. Examples of taxable and nontaxable fringe benefits that are useful to your employees include:

  1. Dependent care assistance
  2. Educational assistance
  3. Retirement plan
  4. Cell phone and cell phone monthly plan
  5. Life insurance
  6. Health Savings Account (HSA)
  7. Paid vacation
  8. Transportation (commuting) benefits. You can even buy a bicycle for your employee and if he uses it to commute to work, you can write it off and he will not have to include the value as taxable income.

Remember, however, that when extending fringe benefits it is important to note that the discrimination rules apply. If benefits are extended to only highly-compensated employees, then all or part of the benefit must be included in the employee’s W2.

Check out IRS’ Publication 15-B for more information and check with your tax professional to find out which benefits are taxable and which are not.