Keeping the Cost of Health Care From Making You Ill

One controversial provision of the Massachusetts law would fine any business that failed to provide health insurance to its employees. 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 alarm or security business afford to offer health insurance to its employees?

For the business owner, there is no better time to learn about some of the options available to help curtail soaring health care costs. In this report, we take a look at the good and bad of high deductibles, Archer Medical Savings Accounts, the benefits of operating as an S corporation and reimbursement plans.

Inside the Massachusetts Model
In Massachusetts, as the new health care law currently stands, individuals will face tax penalties if they choose not to buy insurance. Companies that do not currently offer health insurance to their employees will be required to pay an annual $295 fee for each worker.

State officials in Massachusetts are confident 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.

The Massachusetts model also calls for combining the markets for small business and individuals, a move state lawmakers say should lower the cost of individual policies by nearly 25 percent.

The good news for many security businesses is that Massachusetts’ goal 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 10 or fewer employees.

The bad news is that an increasing number of states across the country — 23 at last count — are considering bills that would force employers to either provide some health insurance coverage for workers or pay a penalty.

Consider Ways to Reduce Cost
Health insurance is rapidly becoming too expensive for many large companies to offer their employers. So what chance does the average alarm or security integration business have to afford coverage for its employees, let alone its owner?

According to a recent survey by the Kaiser Family Foundation, a nonprofit organization based in Menlo Park, Calif., 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.

Many experts say, because of competition for workers with larger businesses, small business owners may be better served by reducing the cost of health care insurance instead of not offering it all.

To this end, there are some key practices to employ:

  • Alarm installation and security integration business owners can often lower premiums by increasing deductible levels or raising the co-payment amounts for certain services, such as office visits and medications
  • Shop around from carrier to carrier
  • Share the cost with employees

Also keep in mind, under federal tax laws, self-employed installers and integrators 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 installer’s or integrator’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 Deductibles Not All Bad
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 $2,000, according to Emily Fox, spokeswoman for eHealthInsurance, an online insurance referral service.

Although a high deductible plan can be difficult for many employees to stomach, an alarm installation or security integration 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 pretax 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.

MSAs Can Offer Cost Advantages
Employees of small businesses, as well as self-employed installers and security integrators can take advantage of Archer Medical Savings Accounts (MSAs) to pay health care expenses — provided the accounts are held in conjunction with “high deductible” health insurance.

Archer MSAs, similar to IRAs, are created solely to defray unreimbursed health care expenses on a tax-favored basis.

The MSA concept originally was to be tested during 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 pretax dollars and distributions are not included in gross income if used to pay for qualified medical expenses.

S Corporations Get Tax-Free Help

Under federal 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 an alarm or security integration 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 2 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 2 percent of the S corporation stock can deduct 100 percent of the amount paid for personal medical insurance, including for a spouse and dependents.

For purposes of this deduction, more than 2 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.

IRS Allows Reimbursement Plans

Offering health insurance coverage for employees remains an expensive option for most installers and integrators. For others it is simply unaffordable. With the latter group in mind, the IRS allows small businesses to reimburse their employees for medical expenses. For example, a security integration business can allocate a set amount of money each year for medical reimbursements. The employees are responsible for purchasing their own health insurance on the open market.

Payments from a medical reimbursement plan are tax-free for the employee and tax
deductible for the alarm or security business. One of the nicest features of these plans is that it allows employers to offer some type of medical benefit without the headache of worrying about rising premiums.

The ever-rising costs of medical care are largely an issue sidestepped with medical reimbursement plans, although escalating costs remain an important consideration for both employees and the security 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 alarm installation or security integration business, and the tax deductions that just might help make it an affordable option?

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