David Rodeck

Are Health Insurance Premiums Tax Deductible? Answering Common Questions About Your Employees’ Premiums

While health care costs take many different shapes, your employees probably associate them most closely with the premiums they pay for their insurance. That said, they may not know everything they should about this piece of the puzzle.

Who sets the price? Where does the money go? Are health insurance premiums tax deductible? Here’s a look at some common questions your employees — and you — might have about your premiums.

What Are Insurance Premiums?

A premium is what you pay to keep an insurance policy active. In exchange for this fee, the insurance company agrees to cover some or all of your medical bills. Monthly premiums are the most common type, but you can also make larger payments less frequently, for instance once a quarter or once a year.

The insurance company collects premiums from its customers to cover their future health care bills. Where, exactly, does the money go? The vast majority — roughly 82 cents of each dollar — goes toward medical expenses like prescription drugs, doctors’ services and hospital visits. The rest of the premium is split between taxes, operating expenses, claims administration, providing technology and the insurer’s profit.

How Do Insurers Set Premiums?

Insurance companies can’t just set any price they think consumers will pay; the government regulates what they charge. Under the Affordable Care Act (ACA), insurers can only base their premiums on the following five factors.

  1. The applicant’s age.
  2. Their location.
  3. Whether they use tobacco.
  4. Whether they’re applying for an individual plan or family plan, which is more expensive because it covers more people.
  5. The level of plan. ACA plans have different categories with different levels of coverage. A plan with a higher premium offers more coverage, meaning the policyholder pays less out of pocket when they receive care.

If an insurance company wants to increase premiums for the next year, they need to apply for approval from the insurance commissioner’s office and prove that either medical costs have gone up or their losses were higher than expected.

Are Health Insurance Premiums Tax Deductible for Employers?

Whatever you pay for employees’ health insurance should be tax deductible for your business. This applies whether you pay the entire premium or split the costs with employees. The share your business pays counts as a tax deduction.

You can also deduct any contributions to employee accounts to help them cover medical expenses, like a health savings account or a health reimbursement account. If your organization uses any of these accounts, giving extra money to employees will earn you a tax break.

For the time being, there is no limit on the employer tax deduction for insurance premiums. While the ACA originally set a penalty for employers paying for plans that were overly expensive known as the Cadillac tax, the government delayed this tax until at least 2022, according to Forbes. For now, whatever you pay for employee premiums is fully tax deductible.

Are Health Insurance Premiums Tax Deductible for Employees?

Whether premiums are tax deductible for your employees is a little less certain; it depends on how they get their coverage. If you provide a group plan at work and they use that, then their premium payments may be deductible.

Intuit notes that payroll typically takes premiums out of employees’ pretax income, meaning the tax break already applies — your employees have less taxable income, which has the exact same effect as claiming a tax deduction when they file their return.

It’s only if your payroll lists the staff’s premium payments as wages that employees should claim a tax deduction for their premiums later. That said, this setup is rare. Chances are, your payroll has taken care of the tax break for employees by taking premiums out of their pretax income.

What About Employee Coverage Outside of Work?

On the other hand, if your employees get their health insurance outside of work, it’s more difficult to qualify for a tax deduction. First, they need to itemize their deductions rather than claiming the standard deduction. Second, starting in 2019 they will only receive a tax deduction if all of their medical expenses, including premiums, exceed 10 percent of their adjusted gross income (AGI), according to Intuit.

For example, if an employee has an AGI of $50,000, their medical costs must be more than $5,000 for anything to be deductible. The first $5,000 of costs will not be deductible — only expenses added on beyond that amount. If their total medical expenses including premiums are $5,500, they will only have a $500 deduction.

Since employees might have trouble deducting premiums outside of work, this is one more reason setting up your own group plan can be beneficial. Even if you don’t cover the premiums yourself, your employees would benefit from the tax break.

The government created a sizable tax deduction for health insurance premiums, especially for workplace plans. By taking advantage of all these benefits, you can make coverage a little more affordable for yourself and employees.

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This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.