Estimates peg health insurance premium increases for 2008 at about 8.7%, on average. This is more than double the 4.1% Consumer Price Index increase for 2007.
Escape hatch: One of the key ways to make health coverage affordable for sole proprietors and business owners is through tax breaks.
Problem: Business owners, other than shareholders in C corporations, cannot enjoy company-paid health coverage on a tax-free basis. But they can arrange coverage in such a way that they maximize their deduction opportunities. Here’s how…
Rank-and-file employees who have their medical premiums paid by their employer are not taxed at all on this fringe benefit. Business owners aren’t so lucky. They can deduct the cost of their premiums, but only as a deduction from gross income…
Careful: If an S corporation is owned by a single shareholder who wants health coverage, it is important to follow IRS rules to ensure this deduction from the shareholder’s gross income. To qualify, the corporation must pay the premiums, or reimburse the shareholder for paying the premiums, and the amount must be included in the shareholder’s wages on his W-2 form. It is not essential that the corporation obtain the policy in the company’s name.
Trap: If the shareholder pays the premiums without reimbursement, he can deduct them only as an itemized medical expense (not as a fully deductible adjustment to gross income).
COVERING OWNER’S SPOUSE
A business owner whose spouse works for his company can transform a nonbusiness deduction into a fully deductible business write-off. How? The business can provide coverage for employees, their spouses, and dependents. If so, then business owners’ coverage is part of the employees’ benefit (spousal coverage) — it’s a business deduction and tax free to employees and their spouses (the owners).
Opportunity: Business owners can expand coverage beyond amounts covered by insurance. Companies can use medical reimbursement plans to pay for a fixed dollar amount (set by the company) — it’s a deductible business expense and tax free to the employee (the owner’s spouse). However, a number of Tax Court cases over the past several years show that there’s a right way and a wrong way to do this.
Right way: The company adopts a medical reimbursement plan, setting forth the terms and conditions for reimbursement (e.g., the spouse-employee must work a set number of hours each week to qualify for this medical benefit). The company must disburse the money to the spouse-employee upon demonstrating that medical expenses not covered by insurance have been incurred.
Wrong way: The company disburses funds to the owner to cover the spouse-employee’s medical costs.
If the company buys a policy, it must be in the name of the employee (the spouse) and not in the employer’s name.
SAVING EVEN MORE
Companies can use a variety of strategies beyond traditional health coverage to pay their health-care costs.
Strategy 1: Health savings accounts(HSAs). Owners can contribute to a personal health savings account on a tax-deductible basis if they are covered by a high-deductible (low-cost) health plan. To qualify…
Note: If the company makes the contribution to the owner’s HSA, it deducts it. For example, if an S corporation carries a high-deductible health plan for its employees and contributes to their HSAs, the corporation deducts the contributions.
Strategy 2: State medical plans. Some states offer certain self-employed individuals and business owners the opportunity to obtain coverage through a state-sponsored plan. Examples…
Important: Self-employed people are not eligible to participate in flexible spending accounts or health reimbursement accounts.