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Legal

The 7-Step Health Care Plan for Small-Business Owners

Discover how to maximize your health-care benefits, reduce costs and get tax benefits to boot.
VIP Contributor
Author, Attorney and CPA
8 min read
Opinions expressed by Entrepreneur contributors are their own.

The following excerpt is from Mark J. Kohler’s book The Tax and Legal Playbook. Buy it now from Amazon | Barnes & Noble | IndieBound | Entrepreneur Books

Over the past few years, I’ve created and implemented a comprehensive health-care strategy with hundreds of clients. My strategy involves using a coordinated attack of maximizing your health-care benefits, reducing costs and getting tax benefits to boot. It consists of seven steps:

  • Minimize or avoid ACA taxes
  • Choose the right type of insurance policy
  • Deduct your health insurance correctly
  • Use the Small Business Health Care Tax Credit
  • Deduct your medical expenses strategically.
  • Start a Health Savings Account (HSA)
  • Understand Health Reimbursement Arrangements (HRAs)

Whether you’re young or old, healthy or unhealthy, single or married with children, there are options that can save or even make you money. Let’s review these options, then I’d suggest you continue your research to see which options can apply in your situation.

Minimize or avoid affordable care act taxes

There are two taxes you should be aware of that can have a significant impact.

The net investment tax is a 3.8-percent income tax most people don’t see coming. Essentially, you owe this tax calculated on the lesser of your net investment income or your modified adjusted gross income exceeding $200,000 for single taxpayers and $250,000 for married taxpayers.

The Medicare tax of .09 percent also kicks in on single individuals with wages or self-employment income of more than $200,000 and married couples with the same type of income over $250,000.

The best way to avoid the net investment tax is to create, transform, or manufacture income that isn’t subject to the tax. The types of income that aren’t subject to this tax include:

  • S corp pass-through income
  • Sale of property if you or your spouse are a real estate profes­sional
  • Self-employment income (the additional Medicare tax provision still applies)
  • Retirement income

Related: 75 Items You May Be Able to Deduct from Your Taxes

The strategies for avoiding the net investment tax are all in line with what I have been teaching and implementing with clients for years:

  • S corps to reduce salary and funnel K-1 income
  • 1031 Exchanges to exchange properties without incurring taxes
  • Installment sales of property
  • Charitable remainder trusts for receiving income on property that you will donate after you die
  • Self-directing your retirement investments and using Roth IRAs and 401(k)s

Choose the right health insurance policy

Some might find it odd to get insurance advice from a tax attorney. However, I’ve attended countless seminars, read hundreds of articles, worked through the health-care websites and consulted hundreds of clients on health-care and insurance topics. I’ve learned some critical tips that can help you:

  • Be aware of what enrollment options are available in your area.
  • Understand the “metal” health insurance plans and the differences between each one. Essentially, you will have to choose between a Platinum, Gold, Silver, or Bronze plan with different benefits, deductibles, and premiums.
  • Know your network. Who’s the doctor you want to use? What hospital? As you look closer, you may be surprised to see a wide range in premiums between the different types of plans based on the network. The savings under certain policies are because the insurance company provides a smaller network of doctors under the plan, which may also be stripped of benefits like dental or vision care.
  • Bet on your health. If you’re healthy and want to self-insure yourself in the future, you can often get a lower premium with a higher deductible and fund a Health Savings Account (more on this below).
  • Cash in on your business. Rely on your status as a small-business owner whenever possible. Don’t forget that you have an edge when shopping for policies. You can possibly shop for an indi­vidual policy or a business policy if you’re going to provide insurance for two or more employees.  

Related: Don't Be Fooled by These C Corp. Fairy Tales

Deduct your health insurance correctly

Health insurance is 100 percent deductible for the small-business owner. A nonbusiness owner would have to try and itemize these costs, more than likely to no avail. Make sure your CPA is aware of all health insurance premiums you’re paying and that they’re properly accounted for.

Use the small-business health care tax credit

This little gem is a literal dollar-for-dollar tax credit against any taxes you owe and up to 50 percent of any health-care premiums you pay for on behalf of your employees. There are a number of simple, very manageable rules. For example, you’re required to cover at least 50 percent of the cost of single (not family) health-care coverage, you must have fewer than 25 full-time-equivalent employees, and those employees must have average wages of less than $50,000 a year. If you have employees, look into it and run the numbers. It’s a great way to provide a perk for employees that also gives you a tax credit.

Deduct your medical expenses strategically

Surprisingly, writing off your medical expenses (not insurance) has gotten increasingly difficult for the average American. It can be done, but it takes a little more creativity; again, being a small-business owner gives you a strategic advantage.

Essentially, I suggest my clients consider either a Health Savings Account (HSA), a Health Reimbursement Arrangement (HRA), or a combination of the two. I discuss these more fully below.

Related: The Most Forgotten Tax Deductions Business Owners Should Take

Start a health savings account (HSA)

Essentially, HSAs are for the healthy and don’t require that you have a small business. However, you must have a high deductible/qualifying health insurance plan. The reason I like these for business owners is because, as an entrepreneur, you’ll typically have much more control over your health insurance plan and can use creative strategies to acquire the right type of insurance.

To hit the highlights, HSAs are pretax accounts, contributions are deductible on the front page of your tax return (regardless of your income level), and the monies in the accounts grow tax-free. Money stays in the plan from year to year and will continue to grow from investments and additional contributions. Tax-free withdrawals can be made at any time for a host of health-care expenses like copays, deductibles, prescriptions, dental, chiropractic, massage therapy, etc.

One other unique strategy is that HSA owners can self-direct the funds into real estate or alternative investments like cryptocurrency, gold, silver, or other small businesses. You can self-direct your HSA account like an IRA and dramatically increase its value to levels that could cover your health-care expenses for the rest of your life with tax-free withdrawals. And, should you die and leave money in the account, the funds will go to any beneficiary you name and then continue to grow tax-free for them. It basically ends up turning into something akin to an IRA in that case.

Understand health reimbursement arrangements

A Health Reimbursement Arrangement (HRA), sometimes referred to as a Section 105 Plan, is a strategy for the unhealthy. When I say “unhealthy,” I simply mean those with higher-than-average medical expenses; HRAs work for those whose insurance plans may not cover everything they need--for example, dental costs, copays, prescription medications, or chiropractic or acupuncture services.

However, this strategy is exclusive to small-business owners. The HRA essentially allows you to set up your own “benefit plan” for health care and reimburse yourself for all your health-care expenses, thereby getting a 100-percent write-off for all medical expenses.

Regrettably, if you’re operating as an S corp, you can’t adopt an HRA for yourself. Moreover, if you simply have rental property held by an LLC, you can’t use an HRA. There are very specific methods for implementing an HRA, which differ depending on whether you’re single or married.

Here are a few quick pros and cons of the HRA.

Pros:

  • Deduct 100 percent of medical expenses in a solo entrepreneur plan
  • Self-administered with no health insurance requirement
  • Great for the “unhealthy” (i.e., you have more than $4,000 in medical expenses per year and the tax benefits exceed the cost of implementing and maintaining the plan)

Cons:

  • No insurance with an HRA if your health gets worse (get insur­ance separately)
  • Requires a family management company (sole prop) if married
  • Requires a C corp if you are single
  • No savings account option

I encourage you to do additional research and speak with your tax advisor, CAP and insurance advisor to formulate a game plan that works for you.

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