Small business health insurance: explain simply

[MinouMinou]

Hi Mustachians,

This is a question about navigating health insurance for family as a small business owner.

I and my family have been spoiled for the last decade by my pretty-good workplace insurance. Now we are contemplating the alternatives for after I leave that workplace. I have looked at my state’s individual marketplace plans, but DH thinks it would be advantageous to get insurance through his small business (he says he is an LLC but files taxes as an S-corp). I would have to become his employee, but he does need help, so.

Does anyone else do this? Can you explain to me simply why it might be advantageous rather than just buying through ACA marketplace? Is it necessary to be a full time employee? There are so many plan options too; it’s a lot to sort through.

[MinouMinou]

So DH says premiums are paid by business and there is a tax credit that covers part. Where my understanding is stuck is that the plan/premium cost for business appears quite a bit more than if we purchased as individuals. And the deductibles are equally high.

[Archipelago]

Can you explain to me simply why it might be advantageous rather than just buying through ACA marketplace?

1. Health insurance is a deductible business expense, so it will lower the overall business profit = pay less in taxes
2. Health insurance can be considered nonmonetary compensation (fringe benefits) and can be factored into reasonable salary.

IANAL or CPA. Paging @SeattleCPA

[SeattleCPA]

I don't think there's a tax angle that automatically makes buying from a private insurance company instead of the exchange a better or worse deal. Thus, I suspect the friend providing this advice is confused. You do have that premium credit to factor into analysis... That's not a tax thing though.

BTW, the correct way to treat health insurance for an S corporation shareholder employee is as W-2 wages. E.g., if someone pays themselves a base salary of (say) $50K but also provides (say) $20K of health insurance, the correct W-2 shows the box 1 wages as $70K. Box 3 and 5 shows $50K though so you only pay payroll taxes on the $50K. Then, on the shareholder-employee's 1040 return, and assuming the $20K of health insurance qualifies as a self-employed health insurance deduction, you deduct the $20K from your total income to get to your AGI.

If you have a decent payroll solution, like Gusto, they should do this for you.

P.S. Possibly the friend is probably actually referring obliquely to this wrinkle?