Optimizing Year-End Business Benefits Part 2: Health Benefits

In our previous article, we explored the advantages of fine-tuning your year-end retirement plan strategy. But your business’s benefits package extends beyond retirement contributions. One of the most impactful non-salary benefits you can offer is healthcare coverage. Providing affordable, reliable access to healthcare through insurance and specialized savings accounts can boost employee morale, reduce absenteeism, and has the potential to positively impact company productivity and financial health—especially when you factor in the significant tax benefits these offerings bring to your business.

In this article, we review what your options are when it comes to providing your own employees (and yourself) with access to insurance plan offerings and tax-advantaged accounts,

SHOP Tax Credits

About 50% of employees state that health insurance benefits are the primary reason they stay at their job and another 45% claim that health insurance was a primary factor in deciding to take the job in the first place.¹ With an average 47% return on investment,² the benefits of providing health insurance are clear, yet only about half of small businesses provide it.³

The U.S. Government’s Small Business Health Options Program (SHOP) helps employers provide their employees with health insurance and gives them a tax credit for doing so. You may be eligible for a tax credit of up to 50% of the premiums you pay for your employees. However, it comes with some caveats: you must have fewer than 25 full-time employees with an average annual salary of $56,000 or less and pay at least 50% of their premiums. Additionally, every full-time employee must be provided coverage – you can’t pick and choose which employees get coverage and then claim a tax credit.

Being aware of this tax credit enables you to factor it into your overall financial plan and gives you a clearer picture of your overall finances.

The Health Savings Account

Building on the tax advantages of SHOP Tax Credits, Health Savings Accounts (HSAs) offer another avenue for both employers and employees to reduce taxable income while planning for future healthcare expenses. Oftentimes, employees are given a choice between low-deductible health insurance plans and high-deductible plans. Those who choose high-deductible plans may qualify to open a Health Savings Account (HSA) and reap the tax benefits it provides.

If you have a Health Savings Account (HSA), have you maximized your contributions so far this year? If not, it’s worth considering. Contributing to an HSA not only reduces your taxable income but also allows your savings to grow tax-free over time.

For 2024, those with HSAs can contribute up to $4,150 for individual coverage or $8,300 for family coverage, with an additional $1,000 catch-up contribution once 55. Like many of the methods we’ve discussed in this article, these contributions can further reduce your taxable income, plus funds can grow tax-free if used for qualified medical expenses​.

These funds can be invaluable in covering future medical expenses, particularly during retirement. Since Medicare typically doesn’t cover long-term care costs, contributing to an HSA with those expenses in mind can help protect your overall retirement savings from being depleted by medical bills.

For business owners, HSA benefits extend to lower payroll taxes, as employee contributions reduce a business’s Social Security and Medicare tax obligations. By maximizing contributions to HSAs before year-end, both you and your employees can reduce taxable income, leading to immediate tax savings that might improve your company’s financial position as you close out the year.

Flexible Spending Accounts (FSAs)

FSAs allow employees to set aside pre-tax dollars for healthcare expenses like prescription medications, medical equipment, and vision or dental care. These accounts offer dual benefits: they give employees a tax-advantaged way to cover medical costs while also providing financial benefits to your business.

Pre-tax employee contributions reduce taxable payroll, benefiting both employees and your business through lower payroll taxes, including Social Security and Medicare taxes. Additionally, the “use it or lose it” rule can actually be beneficial to you, the employer. Any unused funds within the FSA may automatically revert back to the employer at the end of the year (unless your plan offers a grace period or carryover option), helping offset the costs of administering the FSA program.

However, it’s still a good practice to remind employees to monitor their FSA balances and use any remaining funds before the deadline. After all, their health plays a key role in the overall productivity and success of your business!

The Limited Purpose Flexible Spending Account

A Limited Purpose Flexible Spending Account (LPFSA) combines the advantages of a Health Savings Account (HSA) and a Flexible Spending Account (FSA). While employees are often given the choice between an HSA or an FSA, they may prefer not to tap into their HSA during the year. This is because HSAs are designed to grow over time, serving as a resource for more expensive or long-term medical costs.

The LPFSA allows workers to have the best of both worlds: an HSA for significant future medical expenses and an FSA for everyday healthcare costs, such as prescription medications. Just like the FSA, the LPFSA contributions are made pre-tax, which can help lower taxable income.

Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Arrangement (HRA) allows employers to reimburse employees for qualified medical expenses on a tax-free basis. The key difference here is reimbursement – the employee must first pay for their medical expense out of pocket, and then claim a reimbursement. Employees cannot make contributions to the HRA because it isn’t really an account. However, upon your discretion, funds set aside for HRA reimbursements can be still made available the following year, so an employee won’t lose the opportunity to claim a reimbursement.

There are three main types of HRAs:

• Qualified Small Employer HRA (QSEHRA): Designed for small businesses with fewer than 50 employees, allowing reimbursements for medical expenses and insurance premiums.
• Individual Coverage HRA (ICHRA): Allows employers of any size to reimburse employees for individual health insurance premiums.
• Integrated HRA: Used in conjunction with group health insurance plans to help offset out-of-pocket costs.

In terms of year-end financial planning, HRAs allow employers to claim a tax deduction for the reimbursements they make through these plans, while the reimbursement dollars received by employees are generally tax-free. As an employer, factoring in your HRA expenses can help you understand your cash flow and taxable income for the year. However, unlike an FSA or HSA, the deductions you claim are not pre-tax, so they will not affect your payroll taxes for the year. After all, your employee is still getting the same income–you’re just reducing the business’s taxable income when you reimburse a medical expense.

In Conclusion

Healthcare costs are one of the biggest issues that average Americans face throughout their lives. As things stand, medical debt is the number one reason people file for bankruptcy.⁴ Keeping your employees healthy should be the primary goal of any business–a sick or injured worker is an unproductive or absent worker, and your business may suffer as a result.

Providing health insurance t shouldn’t be seen as just another expense but a tangible investment with a measurable ROI, especially when factoring in the tax benefits they offer.

By strategically combining SHOP Tax Credits, HSAs, FSAs, LPFSAs, and HRAs, you can create a robust benefits package that maximizes tax advantages and supports employee health—all while potentially enhancing your year-end financial outcomes. Plus, they help ensure you attract and retain the talent your company needs to remain competitive in a world that’s only getting more and more competitive.

If you’d like assistance factoring in the healthcare benefits your business provides into your overall business and personal financial plans, we’d love to help. Things can quickly become confusing and complicated, so it’s always nice to have a professional guide you through your options. Just click the button below to schedule a consultation.