Providing Life and Heath Insurance Can Provide Many Benefits
One advantage of owning your own business is being able to provide life and health insurance to your family and to your employees, while reaping tax benefits for doing so.
Life insurance is one reasonably inexpensive fringe benefits that you can offer your employees. Plus, having life insurance is essential when your family's futures rests on your and your business.
However, to qualify as a group-term life insurance plan, certain coverage requirements must be met—you can not offer it to only hand-picked employees as "group-term life insurance. See, Employer's Guide to Fringe Benefits (IRS Publication 15-B) for more details.
The cost of group-term life insurance coverage up to $50,000 per employee is deductible on the "employee benefits" line (Line 14) of your Schedule C, unless you are directly or indirectly a beneficiary of the policy. Life insurance on yourself as the business owner is not deductible as a business expense on your Schedule C.
Group Health Insurance Offers Protection and Tax Deductions
Group health benefits that you provide to employees and their dependents are generally deductible. Plus, if you are a sole proprietor, the cost of your own health benefits under the plan are also 100 percent deductible.
Small employers, including tax-exempt organizations, that pay some, or all, of the cost for their employee's health care coverage may able to cut their tax bill substantially by taking advantage of the new health care tax credit. This credit is designed to assist small businesses who offer health coverage to their employees.
In 2010 through 2013, the maximum credit is 35 percent of the employer's eligible premium expenses. Claiming this credit can result in a substantial tax savings.
For example, if you paid $72,000 in health care premiums for your employees and you meet all the requirements for the full amount of the credit, you could claim a credit for $25,200 (35% x $72,000).
Unless you operate in Hawaii, there are no federal or state laws that require you to have a health plan for employees. However, if you do have a health plan, your plan must meet certain federal requirements or be subject to punitive excise taxes.
To avoid these excise taxes, your plan must include certain accessibility and portability features, most notably those that impose strict limits on the extent to which preexisting health conditions of employees or their dependents can be used to limit coverage. If you have 20 employees or more, you must provide COBRA benefits to employees who lose coverage under the plan - that is, you must continue to allow them to purchase coverage at their own expense for up to 18 or 36 months, depending on the reason for the loss of coverage.
If you haven't spoken to your insurance representative recently, we suggest you contact him or her to be sure your plan provides the required coverage.
Self-employed health insurance deduction. Self-employed individuals -- that is, sole proprietors, partners, LLC members, and S corporation shareholders owning more than 2 percent of the shares -- can deduct all of their own health insurance premiums. Previously, only a portion of a self-employed individual's health insurance premiums could be deducted.
Health insurance premiums for yourself and your dependents are deductible on your Form 1040 (Line 29), rather than on your business tax form (e.g., Schedule C for sole proprietors).
As a result, the cost of the premiums reduce your adjusted gross income (AGI.) This, in turn, can increase your ability to take advantage of certain tax breaks like Roth IRAs and tax breaks for education that are subject to phase-outs for higher income taxpayers. Also, the premiums are not considered an itemized medical deduction. Therefore, they are not limited by the 7.5 percent of AGI floor, as are most medical deductions.
Long-term care insurance. Long-term health care contracts are relatively new arrangements designed to provide coverage if you become chronically ill or disabled after reaching a specified age, such as 50. Long-term care policies greatly expand the time period over which benefits will be paid out, when compared to standard accident and health policies. Another significant advantage is that, unlike Medicare coverage, long-term care contracts can cover the cost of custodial care, as well as skilled nursing care. These two advantages often make long-term care contracts a preferred way of pre-funding nursing home care for the elderly.
If certain specified requirements are met, long-term care insurance contracts issued after December 31, 1996, will generally receive the same income tax treatment as accident and health policies. This means that employer-provided long-term care premiums are deductible by the employer as employee benefits. (However, if the benefits are paid by the employee using a flexible spending account, they are not deductible by the employer.) For the business owner, they are treated as health insurance premiums, which means they are also 100 percent deductible.
Investigate Your Health Insurance Options
Health Savings Accounts. While not technically health insurance, Health Savings Accounts can be used to help employees, and yourself, meet the cost of high-deductible insurance plans. A health savings account (HSA) is a tax-exempt account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an "eligible individual" to take advantage of an HSA. Although you don't need IRS permission or authorization to set up an HSA, you do need to with a trustee, such as a bank or an insurance company.
To be an eligible individual and qualify for an HSA, you must meet the following requirements.
- You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You have no other health coverage except
- coverage for liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property
- coverage for a specific disease or illness
- coverage that pays a fixed amount per day (or other period) of hospitalization.
- coverage for accidents, disability, dental care, vision care and long-term care
- You are not enrolled in Medicare.
- You cannot be claimed as a dependent on another's tax return.
High deductible health plan (HDHP). A high deductible health plan is exactly what the name implies: it is a medical insurance plan that has a deductible that is significantly higher than the average health insurance deductible. However, it also sets a maximum amount that you must pay each year.
This maximum is the limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include co-payments and other amounts, but do not include premiums. These amounts are set by law and are adjusted annually if warranted by inflation.
An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible. Some examples of preventive care are annual physicals, including routine tests, routine prenatal and well-child care, child and adult immunizations, "stop smoking" and "weight loss" programs and screenings for cancer, heart disease, mental health conditions, substance abuse and other routine screenings.
The following tables show the minimum annual deduction and the total maximum expenses (deductibles plus out-of-pocket expenses) for HDHPs for 2012 and 2013.
|HDHP Limits for 2012 |
|Limitation ||Self-only coverage ||Family coverage |
|Minimum annual deductible ||$1,200 ||$2,400 |
|Maximum annual deductible and other out-of-pocket expenses* ||$6,050 ||$12,100 |
|HDHP Limits for 2013 |
|Limitation ||Self-only coverage ||Family coverage |
|Minimum annual deductible ||$3,200 ||$6,450 |
|Maximum annual deductible and other out-of-pocket expenses* ||$4,300 ||$7,850 |
Contributions to HSAs made by self-employed individuals will be deductible in computing their adjusted gross income. Money in these accounts can then be used to pay for qualified medical expenses, including the insurance deductible and co-payments. Any money left over at the end of the year can be saved for future years, unlike Flexible Spending Accounts (FSAs) which are"use it or lose it."
If you make contributions to your employee's accounts (i.e., other than what they voluntarily have deducted from their paychecks), you must do so at a uniform rate or dollar amount. If so, you can deduct the contributions as employee benefits on Line 14 of the Schedule C. Contributions may be made for a tax year at any time until the due date of the return for that year (not including extensions). The employer's contributions must be reported on the employee's W-2.
Amounts you contribute to your employees' HSAs are excluded from their income (unless made via a "cafeteria plan") and are reported as deductible employee benefits on Line 14 of the Schedule C, and your own benefits would be included on Line 29 of your Form 1040.
Archer Medical Savings Accounts. Under a pilot program that ended after 2007, employees of small businesses (50 or fewer employees) and self-employed individuals were able to set up Archer Medical Savings Accounts (MSAs) to pay health care expenses, provided the accounts were used in connection with high-deductible health insurance. Although new MSA accounts can not be created (instead, you can create an HSA, as discussed above,) contributions may still be made to existing accounts. Also, the amounts in an MSA may be rolled over with no tax consequences to a Health Spending Account.
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