ACA Makes Health Insurance Taxable – Or Does It?
The Affordable Care Act (ACA) contains various provisions that affect farmers, even those with less than 50 employees. One of the primary provisions concerns the payment of health insurance premiums for employees who are not covered by a group plan. In the past, the payment of these premiums was usually deductible for the farmer/employer and a non-taxable fringe benefit to the employee.
With the ACA, it is likely that most farmers who provide health insurance for their employees AND is not provided by a group plan will be allowed to deduct the premium, however, the premium paid will be taxable compensation to the employee. For many farmers, it may make sense for them to have their employees obtain health insurance from the state or federal exchange and reimburse the employees for these premiums (add it to their W2 wages) than to offer a group insurance plan.
Since farm employees generally earn a fairly low wage (compared to their urban counterparts), their actual out-of-pocket cost may be substantially lower than a group insurance premium. Therefore, it may be cheaper for the employer to cover this subsidized premium (again as W2 compensation), then offer a group plan.
For example, assume a farmer wants to cover 100% of an employee’s health insurance premium. The employee can obtain this coverage for $50 per month on a subsidized basis, whereas, the cost to provide this as part of a group plan will be $350 per month. If the farmer is in the 25% tax bracket, the net taxable cost of the group premium is $262.50 per month. The after-tax cost of reimbursing the employee the $50 and running it through payroll is about $40 and if the farmer wants to make sure the employee breaks even, it will cost another $10 or so per month. All-in-all, $50 after-tax is still much lower than $262.50.
As with all ACA items regarding health care and insurance, this whole arena is in a state of flux politically. This is the current rule, but change can happen quickly. We will keep you posted.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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