Do Employers Get Tax Breaks for Offering Health Insurance?

Federal tax law provides advantages for employers who offer health insurance. These tax benefits are a long-standing feature of the tax code, designed to encourage health coverage by substantially lowering the cost of this benefit. Understanding these advantages is part of managing employee compensation and business expenses, making health insurance more accessible for businesses of all sizes.

Employer Premium Tax Deductions

A primary tax advantage for employers offering health insurance is the ability to deduct the premiums they pay. These payments are considered an ordinary and necessary business expense under the Internal Revenue Code. This allows a business to deduct 100% of the premium costs it contributes on behalf of its employees, which directly reduces the company’s taxable income.

The application of this deduction is broad, covering various business structures. For C-corporations, the premiums are simply deducted as a business expense on their corporate tax return. The rules for pass-through entities like S-corporations, partnerships, and sole proprietorships are slightly different, particularly for owner-employees, but the core principle of deducting premiums paid for non-owner employees remains.

Beyond the income tax deduction, employers also realize savings on payroll taxes. Employer contributions toward employee health insurance premiums are not subject to federal payroll taxes, including Social Security and Medicare (FICA) taxes, or Federal Unemployment Tax Act (FUTA) taxes. This exclusion provides an immediate, direct cost saving for the employer on every dollar contributed to health premiums.

This favorable tax treatment extends to the employee as well. The value of the employer’s contribution to health insurance is excluded from the employee’s gross income. This means the employee does not pay federal income tax or their share of FICA taxes on the benefit they receive.

Small Business Health Care Tax Credit

Distinct from a deduction, a tax credit reduces an employer’s tax liability on a dollar-for-dollar basis. The Small Business Health Care Tax Credit is specifically designed to help smaller employers afford the cost of health insurance. The credit is only available to employers who purchase a qualified health plan through the Small Business Health Options Program (SHOP) Marketplace.

Eligibility is tightly restricted based on company size and employee wages. An employer must have fewer than 25 full-time equivalent (FTE) employees for the tax year. Additionally, the average annual wages paid to those employees must be below a specific threshold, which is indexed for inflation by the IRS. For 2025, the average annual wages must be less than $66,600.

The employer must also contribute at least 50% of the premium cost for employee-only coverage. The credit amount is calculated on a sliding scale, offering the largest benefit to the smallest businesses with the lowest average wages. The maximum credit is 50% of the employer-paid premiums for for-profit entities and 35% for tax-exempt organizations.

The credit can only be claimed for two consecutive taxable years. The complexity of FTE and average wage calculations, combined with the two-year limit, requires careful analysis before an employer commits to a SHOP plan with the expectation of receiving the credit.

Health Reimbursement Arrangements

Health Reimbursement Arrangements (HRAs) offer another tax-advantaged way for employers to help employees with medical costs. Instead of paying premiums for a group plan, the employer provides tax-free reimbursements for individual health insurance premiums and other qualified medical expenses. These employer reimbursements are tax-deductible business expenses for the company, providing a flexible alternative to sponsoring a group policy.

One common type is the Qualified Small Employer HRA (QSEHRA). This arrangement is available to employers with fewer than 50 full-time equivalent employees who do not offer a group health plan. With a QSEHRA, the employer sets a reimbursement allowance up to annual limits defined by the IRS. For 2025, these limits are $6,350 for self-only coverage and $12,800 for family coverage. Employees purchase their own health insurance and then receive tax-free reimbursements from the employer up to their allowance.

A more flexible option is the Individual Coverage HRA (ICHRA). Unlike the QSEHRA, the ICHRA is available to employers of any size and has no cap on the reimbursement amounts an employer can offer. An ICHRA can be offered to different classes of employees, providing greater customization. Employees use the tax-free funds to purchase their own individual market health insurance plan. The employer’s contributions to the ICHRA are tax-deductible.

Claiming Tax Benefits and Reporting Requirements

For general premium deductions, the location of the deduction depends on the business structure. A sole proprietor would report these costs on Schedule C (Form 1040), while corporations report them on Form 1120, U.S. Corporation Income Tax Return, typically as part of employee benefit program expenses.

Employers must complete and attach Form 8941, Credit for Small Employer Health Insurance Premiums, to their business income tax return. This form is used to calculate the credit based on the number of employees, average wages, and premiums paid through a SHOP plan. The calculated credit then flows from Form 8941 to the business’s main tax form to reduce the total tax liability.

HRA contributions are included in the total deductions on the appropriate business tax return, such as Form 1120 for corporations or Schedule C for sole proprietorships. It is important for employers to maintain clear records of all premium payments and reimbursements to substantiate these deductions and credits in the event of an IRS inquiry.