Are the Premiums Tax-Free?
When it comes to funding individual health insurance, the tax treatment of premiums can vary depending on the size of your company and the type of health reimbursement arrangement (HRA) you use.
Employers with Fewer Than 50 Full-Time Employees
For smaller employers, you have two primary options:
Post-Tax Premiums with Tax Credits
- Employees pay for their health insurance premiums with post-tax dollars. In this scenario, employees may be eligible for premium tax credits through the Health Insurance Marketplace, which can significantly lower their monthly premium costs.
Pre-Tax Premiums via a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
- Employers can fund their employees' health insurance premiums on a pre-tax basis using a QSEHRA. This means the contributions you make towards your employees' health insurance premiums are not subject to federal income and payroll taxes. However, in many cases, our clients find that the post-tax option with tax credits is more advantageous than the pre-tax QSEHRA or even their pre-tax group health plans. This is because the tax credits often provide greater savings for employees compared to the tax benefits of a QSEHRA.
Employers with 50 or More Full-Time Employees
For larger employers, the QSEHRA option is not available. Here's how you can manage your health insurance premiums:
Post-Tax Premiums with Tax Credits
- Since QSEHRA is not an option, premiums are paid post-tax. However, employees may still be eligible for tax credits through the Health Insurance Marketplace, which can help reduce their out-of-pocket premium costs.
In summary, while smaller employers can take advantage of both post-tax and pre-tax options through QSEHRA, larger employers are limited to post-tax premiums but can still benefit from tax credits to help offset the cost. Each approach has its own set of advantages, and choosing the right one depends on your specific circumstances and the needs of your employees.