Finding skilled talent is a high priority for almost any industry you read about in the US. Employee benefits like health insurance and paid time off are mainly done to attract and retain the best employees, but there are some tax savings incentives associated with this practice. Consider the following tax savings options through employee benefits:
Qualified deferred compensation plans
These plans include pension, profit-sharing and 401(k) plans, as well as SIMPLEs. You take a tax deduction for your contributions to employees’ accounts. Certain small employers may also be eligible for a credit when setting up a plan.
Retirement plan credit
Small employers (generally those with 100 or fewer employees) that create a new retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of the first $1,000 in qualified plan startup costs. Employers must file IRS Form 8881 – Credit for Small Employer Pension Plan Startup Costs.
HSAs and FSAs
If your business provides employees with a qualified high deductible health plan (HDHP), you can offer them Health Savings Accounts to contribute dollars pre-tax for certain medical expenses. Regardless of the type of health insurance you provide, you can also offer Flexible Spending Accounts for health care. If you have employees who incur day care expenses, consider offering FSAs for child and dependent care.
Employees can also contribute to an FSA for unreimbursed business expenses such as parking. The money for HSAs and FSAs can be contributed pre-tax, helping employees reduce their taxable income for expenses they would pay for anyway. A certain amount of money from FSAs can be carried forward for non-health care related expenses. HSAs can be a long-term investment vehicle if employees don’t need to use the funds for medical care.
A Health Reimbursement Account reimburses an employee for medical expenses up to a maximum dollar amount. Unlike an HSA, no high deductible health plan (HDHP) is required. Unlike an FSA, any unused portion can be carried forward to the next year. But only the employer can contribute to an HRA. The employer sets the parameters for the HRA, and unused dollars remain with the employer rather than following the employee to new employment. Because the reimbursements occur pre-tax, employees and employers often save up to 50% in combined taxes on the cost of medical expenses.
Small-business health care credit
The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium. For 2016, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of less than $25,900 per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $51,800. To qualify, employers must generally be enrolled online in the Small Business Health Options Program (SHOP). The credit can be taken for only two years, and the years must be consecutive.
Some fringe benefits — such as employee discounts, group term-life insurance (up to $50,000 annually per person), parking (up to $255 per month), mass transit / van pooling (also up to $255 per month for 2016, because Congress has made parity permanent) and health insurance — aren’t included in employee income. Yet the employer can still receive a deduction for the portion, if any, of the benefit it pays and typically avoid payroll tax as well.
Play-or-pay penalty risk
Not all employee benefits are created equal in terms of tax advantage. The play-or-pay provision of the Affordable Care Act (ACA) does impose a penalty on “large” employers if just one full-time employee receives a premium tax credit. Premium tax credits are available to employees who enroll in a qualified health plan through a government-run Health Insurance Marketplace (e.g. exchanges) and meet certain income requirements — but only if: they don’t have access to “minimum essential coverage” from their employer, or the employer coverage offered is “unaffordable” or doesn’t provide “minimum value.” The IRS has issued detailed guidance on what these terms mean and how employers can determine whether they’re a “large” employer and, if so, whether they’re offering sufficient coverage to avoid the risk of penalties.
Review your company’s employee benefits with your tax advisor to determine which benefits may provide additional business tax savings. If you are planning to add new benefits, explore the advantages and tax implications first.
Continue Reading: Which tax credits apply to my business in 2016?
If you have questions about any of these potential deductions, employee benefits incentives or tax credits for the current or coming tax year, talk to the Tax Services Group at Cornwell Jackson. You may also download our newest Tax Planning Guide.
Gary Jackson, CPA, is the lead tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax advisory services to individuals and business leaders in the Dallas/Fort Worth area and across North Texas.