Too Late for Affordable Health Care Options?

The Commonwealth of Massachusetts recently passed legislation making health insurance mandatory for every state resident. One controversial provision of that bill would fine any business that failed to provide health insurance to its employees.

The Massachusetts plan aims to make both individuals and businesses more responsible for covering the state's citizens. Individuals will face tax penalties if they choose not to buy insurance. When, as expected, state lawmakers overturn the Governor's veto of this provision, companies that do not offer health insurance to their employees will be required to pay a $295-a-year fee for each worker.

The Cost of Universal Coverage
State officials in Massachusetts are confident that they can bring down the cost of insurance by adding to the number of people in the insurance pool and by allowing insurers to offer less expensive plans with less extensive coverage. Massachusetts' universal health care plan also calls for combining the markets for small business and individuals, a move state lawmakers say that should lower the cost of individual policies by nearly 25 percent.

The good news for many composites manufacturing operations and businesses is that Massachusetts' goal is to expand coverage to an additional 515,000 of the state's 6.4 million residents during the next three years sidesteps some smaller employers, generally those with ten or fewer employees. The bad news is that an increasing number of states—23 at last count—are also considering bills that would force employers to either provide some health insurance coverage for workers or pay a penalty. While there are loopholes, exemptions and a great deal of controversy connected with this bold universal health care initiative, it raises an interesting question: can your composites manufacturing business afford to offer health insurance to its employees?

Insuring the Masses
Soaring premiums have placed health insurance in the category of a luxury that an estimated 43 million individuals cannot afford. Health insurance is also rapidly becoming far too expensive for many large employers that traditionally provided coverage for their employees. What chance does the average composites manufacturing business have of being able to afford coverage for its employees, let alone its owner? According to a recent survey by the Kaiser Family Foundation, a non-profit organization based in Menlo Park, CA, small businesses (defined as those with three to 199 employees) experienced a 9.8 percent increase in health insurance premiums in 2005. The average small business now pays $4,032 a year for individual coverage and $10,584 for a family.

Facing competition with larger businesses in attracting workers, small business owners may, according to many experts, be better off finding ways to reduce the cost of health care insurance rather than not offering it.

In many cases, composites manufacturing business owners can lower premiums by increasing deductible levels or raising the co-payment amounts for certain services, such as office visits and medications. Another key to affordability is to shop around from carrier to carrier. Another is to share the cost with employees. And, don't forget our federal tax laws: the tax deduction by "self-employed" composites manufacturing professional is 100 percent of the cost subtracted from adjusted gross income.

Self Employed
Under our federal tax laws, self-employed composites manufacturing professionals and business owners may deduct from their gross income 100 percent of amounts paid during the year for health insurance for themselves, spouses and dependents. The deduction is limited to the professional's net annual income derived from that self-employment, minus the deduction for 50 percent of the self-employment tax and/or the deduction for contributions to Keogh, self-employed SEP or SIMPLE plans. Amounts eligible for the deduction do not include amounts paid during any tax period when the self-employed individual was able to participate in a subsidized health plan maintained by their employer or their spouse's employer.

High Deductible Plans
Although such plans may require the assistance of a professional to establish, as mentioned, the biggest savings often result from so-called "high deductible" health insurance plans. On average, premiums decrease by 10-percent to 30-percent when the deductible jumps from $500 to $2000, according to Emily Fox, spokesperson for eHealthInsurance.com, an online insurance referral service. Although a high deductible plan can be difficult for many employees to stomach, a composites manufacturing business offering to contribute part of the money saved on premiums into a Health Savings Account (HSA) for each worker can help ease the financial burden.

The Internal Revenue Service allows both employers and individuals to set aside pre-tax dollars into an HSA to help pay for out-of-pocket medical expenses, including those steep deductibles. Any amount paid out of a HSA, and used exclusively to pay the qualified medical expenses, is not included in the worker's gross income. Contributions made to such plans by an employer are, of course, tax deductible.

Much like Individual Retirement Accounts (IRAs), pre-tax contributions to a HSA plan are limited. HSA contributions cannot exceed the lesser of the annual deductible or $2,650 for self-coverage or $5,250 for families in 2005.

Distributions or withdrawals from HSA accounts that are not used to pay medical expenses must be included in income and are subject to a 10 percent penalty. With an HSA, however, any money that is not used in a given year can be rolled over into the next for future medical expenses.

Medical Savings Accounts
Employees of small businesses as well as self-employed composites manufacturing professionals can take advantage of Archer Medical Savings Accounts (MSAs) to pay health care expenses—provided, of course, that accounts are held in conjunction with "high deductible" health insurance. Archer MSAs, similar to IRAs, are created solely to defray un-reimbursed health care expenses on a tax-favored basis.

The MSA concept originally was to be tested over a four-year period or until the number of accounts reached a specific threshold level (750,000). Since the number of MSAs established is still significantly less than the 750,000 numerical limits, Congress extended the ability to establish a MSA through 2005—or the time when the numerical limit is achieved, whichever comes first.

Contributions to MSAs are made with pre-tax dollars and distributions are not included in gross income if used to pay for qualified medical expenses.

Who is an Employee to Whom?
Under our tax rules, contributions by an employer to provide (through insurance or otherwise) accident and health benefits are not taxable to the employee. The employer's contributions are, of course, deductible expenses.

When it comes to health insurance or any fringe benefit paid to employees of a composites manufacturing business operating as an S corporation, the tax treatment is different for employee-shareholders than for other employees. Fringe benefits paid to S corporation employees who are not shareholders, or who own two-percent or less of the outstanding S corporation stock, are tax-free.

Those payments may be excluded from the employee's taxable income and are deductible as fringe benefits by the S corporation. However, an owner-employee who owns more than two percent of the S corporation stock can deduct 100 percent of the amount paid for medical insurance for him, his spouse and dependents.

For purposes of this deduction, a more than two percent shareholder's wages from the S corporation are treated as the shareholder's earned income derived from the trade or business for which the plan is established.

The payment of premiums by a partnership for a partner's health or accident insurance is generally deductible by the partnership and included in the partner's gross income. The partner can of course, deduct 100 percent of the cost of health insurance premiums paid on his or her behalf.

Medical Reimbursement Plans
Offering health insurance coverage for employees remains an expensive option for most composites manufacturers; for others it is simply unaffordable. Under our tax laws, the IRS allows small businesses to reimburse their employee for medical expenses. The business sets the amount of money it is willing to lay out every year and the employee then goes out and purchases health insurance on the individual market.

Payments from a Medical Reimbursement Plan are tax-free for the employee and tax deductible for the composites manufacturing business. One of the nicest features of these plans is that it allows employers to offer some type of medical benefit without the headaches of worrying about rising premiums.

The ever-rising costs of medical care are largely an issue sidestepped with Medical Reimbursement Plans, although those ever-escalating costs remain an important consideration for both employees and the composites manufacturing businesses that employ them - not to mention the owners of those businesses.

Fortunately, health insurance is not yet mandatory and unlikely to become so anytime soon. However, the Massachusetts plan and universal coverage plans under consideration in other states may be an indication of things to come. What better time to investigate health care insurance, options for the employees of your composites manufacturing business, and the tax deductions that just might help make it an affordable option for the business — and you, its owner?

Mark Battersby is a freelance tax and financial writer with offices in the suburban Philadelphia community of Ardmore, Pa. For more than 25 years, Mr. Battersby's features and columns have appeared in leading trade journals and magazines. He has also authored four books.