What are health insurance solutions for a small business owner?
By: Angela Cordle
What are health insurance solutions for a small business owner?
Answer:Employers generally consider group health insurance when they want to offer health insurance benefits to a small group of employees; however, group health insurance coverage may not be an option if you do not have an employee group of at least two individuals, which could include family members. Assuming your spouse or dependents (children) do not work in your business as employees drawing W-2 compensation and your primary objective is to obtain health insurance coverage for yourself, your spouse and your dependent(s) as a replacement for your former employer’s COBRA coverage, you may find it less costly to obtain health insurance coverage for yourself and your immediate family members in the individual insurance market.
We do not know your company’s or your personal budget for health insurance coverage, but the best method to research and evaluate health insurance alternatives is to work with a local, qualified health insurance agent or broker who can help you evaluate alternatives, design a plan and then obtain quotes from the insurance companies. It is often important to work with an independent broker who can shop your insurance with several companies and not just one insurance company. Also, small business and other trade associations or organizations often offer insurance programs or broker referrals for their members. In addition to local directories and resources, you can use an Internet search engine to research group and individual health insurance and locate an agent. The following are example websites:
- Health Insurance Information: medhealthinsurance.com
- Health Insurance Employer Overview: digitalinsurance.com
- Business Insurance Deals and Sites: insurancestart.com
- Free Insurance Quotes: mostchoice.com
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Self-employed individuals and small business owners do have health insurance alternatives, though finding affordable and comprehensive health, dental and other insurance coverage for a particular individual or employee group can often be a challenge depending on pre-existing conditions and other factors.
Also, health insurance costs vary widely based on a number of factors. For example, group medical insurance premiums vary depending upon the type of plan (HMO, PPO, etc), deductibles, coverage, age and health of the employee group, and other factors. In addition, most businesses require employees to contribute towards the cost, often up to 50% or more, which helps with the affordability issue.
With respect to group health insurance, state laws affecting access to small group health insurance vary and companies have some discretion in establishing participant qualifications based on hours worked and job classifications. You can review general group health insurance information at the following websites:
In terms of alternatives, while the business structure can affect the tax treatment of fringe benefit plans and the IRS has various rules with respect to accident and health plans in particular, one type of plan that is popular with self-employed business owners is a Section 105 HRA or medical reimbursement plan. A Section 105 medical reimbursement plan is any plan or arrangement established in accordance with Internal Revenue Code Section 105 under which an employer reimburses an employee for uninsured health or accident expenses incurred by the employee or their dependents. Section 105 allows a 100% deduction for health insurance premiums and even allows companies to write off other non-insured medical, dental and vision expenses as well. Employees, including owner-employees, must draw a regular W-2 salary or wages from the business in order to qualify as employees under the IRS rules, but in most situations employers and employees can save Federal, State and Local income taxes, FICA (Social Security and Medicare) taxes, workers’ compensation, unemployment taxes, and state disability insurance (where applicable) payroll taxes with a Section 105 plan. Due to the IRS limitations on health insurance and other medical expense deductions for the self-employed, a self-employed business owner who can legitimately employ his or her spouse as a W-2 employee and provide him or her with health insurance coverage through the business, which includes dependent coverage for the owner and other family members, will find a Section 105 plan particularly appealing. However, it is important to note that more than 2% of S Corp owner-employees generally cannot participate in a Section 105 plan, and if they do, any benefits provided under the plan to the owner-employee and his or her spouse and dependents must be included in the owner-employee’s W-2 compensation as taxable wages.
While you can review information on Section 105 plans yourself, your tax advisor, a local health insurance broker or agent or a Section 105 plan sponsor, like one of those found at the websites included below, can help you determine if a Section 105 plan is a viable alternative in your circumstances.
- Section 105 Plan Information: nwhin.com
- BASE Health Reimbursement Arrangement: baseonline.com
- Section 105 HRA Plans Saving Thousands in Taxes for the Self-Employed: coredocuments.com
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Even if a Section 105 plan is not an option, provided all of the IRS qualifications for claiming the self-employed health insurance deduction are met, self-employed business owners (i.e. sole proprietors, partners, shareholder-employees of S corps, and LLC members) can generally deduct 100% of the cost of their medical insurance premiums, including coverage for their spouse and dependents, as an adjustment to gross income on their personal tax return, Form 1040. You can review IRS information on the Self-Employed Health Insurance Deduction at:
- Insurance: irs.gov (see Self-Employed Health Insurance Deduction)
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Another option is the Health Savings Account (HSA) approach. The HSA approach provides an opportunity for cash savings by combining a high deductible health insurance policy with an IRA type savings account that individuals can use to fund their out-of-pocket medical and dental expenses.
With an HSA plan, an individual purchases an HSA qualified high deductible health insurance policy, also referred to as an HDHP, and then establishes an HSA with a bank or other authorized provider. The individual then funds the HSA in an amount up to the IRS annual limit (see website below for the 2013 limits) and then uses the funds in the HSA to pay for qualified medical expenses that are not covered by the HDHP. Except in very limited circumstances, the funds held in an HSA cannot be used to pay the premiums for the HDHP. Subject to the IRS rules, contributions made to the HSA are tax deductible, earnings on those contributions grow tax-free, and distributions from the account are tax-free provided they are used to pay for qualified medical expenses. Also, the right HSA plan program has to include a good PPO so that costs have been pre-negotiated with the health care providers. For more information, you can review HSA discussions and search for HSA providers in the Yellow Pages or on the Internet. The following are example discussions:
- 2013 HSA Contribution Limits, Deductibles, and Out-of-Pocket Expenses: hsacenter.com
- Administrative, Procedural and Miscellaneous: irs.gov
- Is an HSA Right For You? mayoclinic.com
- Full Service Health Savings Accounts: americanhealthvalue.com
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If cost is a major constraint, you could look at a catastrophic coverage plan with a very high deductible and relatively low cost and supplement that coverage with a health discount card that would provide PPO discounts. For as little as $15 to $20 per month, you can get significant discounts on healthcare costs through participation in a PPO. While this is not insurance, it is an excellent way to contain costs for those without adequate coverage. For an example, go to:
Related discussions:
- Health Insurance Versus Medical Discount Plans: googobits.com
- Discount Health Plans Vs Health Insurance – Pros and Cons: thesmarterwallet.com –
- Discount Plan or Health Insurance: ftc.gov
- What is the Difference Between a Discount Health Program and Health Insurance: smartconsumergroup.com
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Federal individual mandate: The recent Patient Protection and Affordable Care Act includes an individual mandate that may also be a consideration in your search for affordable health insurance. You can review the following state and industry information that explains the individual mandate and the potential penalties for not having health insurance that start in 2014 and the federal and state health insurance exchanges designed to help individuals buy affordable health insurance:
- Health Insurance Information: medhealthinsurance.com
- Health Insurance Employer Overview: digitalinsurance.com
- Business Insurance Deals and Sites: insurancestart.com
- Free Insurance Quotes: mostchoice.com
Self-employed individuals and small business owners do have health insurance alternatives, though finding affordable and comprehensive health, dental and other insurance coverage for a particular individual or employee group can often be a challenge depending on pre-existing conditions and other factors.
In terms of alternatives, while the business structure can affect the tax treatment of fringe benefit plans and the IRS has various rules with respect to accident and health plans in particular, one type of plan that is popular with self-employed business owners is a Section 105 HRA or medical reimbursement plan. A Section 105 medical reimbursement plan is any plan or arrangement established in accordance with Internal Revenue Code Section 105 under which an employer reimburses an employee for uninsured health or accident expenses incurred by the employee or their dependents. Section 105 allows a 100% deduction for health insurance premiums and even allows companies to write off other non-insured medical, dental and vision expenses as well. Employees, including owner-employees, must draw a regular W-2 salary or wages from the business in order to qualify as employees under the IRS rules, but in most situations employers and employees can save Federal, State and Local income taxes, FICA (Social Security and Medicare) taxes, workers’ compensation, unemployment taxes, and state disability insurance (where applicable) payroll taxes with a Section 105 plan. Due to the IRS limitations on health insurance and other medical expense deductions for the self-employed, a self-employed business owner who can legitimately employ his or her spouse as a W-2 employee and provide him or her with health insurance coverage through the business, which includes dependent coverage for the owner and other family members, will find a Section 105 plan particularly appealing. However, it is important to note that more than 2% of S Corp owner-employees generally cannot participate in a Section 105 plan, and if they do, any benefits provided under the plan to the owner-employee and his or her spouse and dependents must be included in the owner-employee’s W-2 compensation as taxable wages.
- Section 105 Plan Information: nwhin.com
- BASE Health Reimbursement Arrangement: baseonline.com
- Section 105 HRA Plans Saving Thousands in Taxes for the Self-Employed: coredocuments.com
Even if a Section 105 plan is not an option, provided all of the IRS qualifications for claiming the self-employed health insurance deduction are met, self-employed business owners (i.e. sole proprietors, partners, shareholder-employees of S corps, and LLC members) can generally deduct 100% of the cost of their medical insurance premiums, including coverage for their spouse and dependents, as an adjustment to gross income on their personal tax return, Form 1040. You can review IRS information on the Self-Employed Health Insurance Deduction at:
- Insurance: irs.gov (see Self-Employed Health Insurance Deduction)
Another option is the Health Savings Account (HSA) approach. The HSA approach provides an opportunity for cash savings by combining a high deductible health insurance policy with an IRA type savings account that individuals can use to fund their out-of-pocket medical and dental expenses.
With an HSA plan, an individual purchases an HSA qualified high deductible health insurance policy, also referred to as an HDHP, and then establishes an HSA with a bank or other authorized provider. The individual then funds the HSA in an amount up to the IRS annual limit (see website below for the 2013 limits) and then uses the funds in the HSA to pay for qualified medical expenses that are not covered by the HDHP. Except in very limited circumstances, the funds held in an HSA cannot be used to pay the premiums for the HDHP. Subject to the IRS rules, contributions made to the HSA are tax deductible, earnings on those contributions grow tax-free, and distributions from the account are tax-free provided they are used to pay for qualified medical expenses. Also, the right HSA plan program has to include a good PPO so that costs have been pre-negotiated with the health care providers. For more information, you can review HSA discussions and search for HSA providers in the Yellow Pages or on the Internet. The following are example discussions:
- 2013 HSA Contribution Limits, Deductibles, and Out-of-Pocket Expenses: hsacenter.com
- Administrative, Procedural and Miscellaneous: irs.gov
- Is an HSA Right For You? mayoclinic.com
- Full Service Health Savings Accounts: americanhealthvalue.com
If cost is a major constraint, you could look at a catastrophic coverage plan with a very high deductible and relatively low cost and supplement that coverage with a health discount card that would provide PPO discounts. For as little as $15 to $20 per month, you can get significant discounts on healthcare costs through participation in a PPO. While this is not insurance, it is an excellent way to contain costs for those without adequate coverage. For an example, go to:
Related discussions:
- Health Insurance Versus Medical Discount Plans: googobits.com
- Discount Health Plans Vs Health Insurance – Pros and Cons: thesmarterwallet.com –
- Discount Plan or Health Insurance: ftc.gov
- What is the Difference Between a Discount Health Program and Health Insurance: smartconsumergroup.com
Federal individual mandate: The recent Patient Protection and Affordable Care Act includes an individual mandate that may also be a consideration in your search for affordable health insurance. You can review the following state and industry information that explains the individual mandate and the potential penalties for not having health insurance that start in 2014 and the federal and state health insurance exchanges designed to help individuals buy affordable health insurance:
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