What Is an Essential Health Benefits (EHB) Deductible?

Health insurance can be complex, especially regarding tax implications. Understanding whether health-related expenses are tax-deductible is a common concern for individuals and business owners. This article explores Essential Health Benefits (EHB) and how health coverage and medical care costs can impact your tax obligations. It outlines conditions and procedures for claiming these potential deductions.

Defining Essential Health Benefits

Essential Health Benefits (EHB) are minimum coverage standards for health insurance plans, established under the Affordable Care Act (ACA). These benefits were designed to ensure comprehensive coverage for a broad range of services. The ACA mandated that all new individual and small-group health insurance policies, including those sold through the Health Insurance Marketplace, cover these categories without annual or lifetime limits.

The ACA outlines ten categories of EHB that health plans must cover:
Ambulatory patient services (outpatient care received without hospital admission)
Emergency services (coverage for urgent medical situations)
Hospitalization (inpatient care, including surgeries and overnight stays)
Maternity and newborn care (services before and after birth)
Mental health and substance use disorder services (including behavioral health treatment)
Prescription drugs
Rehabilitative and habilitative services and devices (designed to help individuals regain or acquire skills for daily functioning)
Laboratory services
Preventive and wellness services, and chronic disease management (included to promote health and address ongoing conditions)
Pediatric services, including oral and vision care for children

While these categories are consistent across states, specific services within each category can vary based on state-designated benchmark plans.

Deductibility for Individuals

Individuals can deduct health-related costs, including those for plans covering Essential Health Benefits. Self-employed individuals, including sole proprietors, partners, and S corporation shareholders owning over 2% of the company, can often deduct 100% of their health insurance premiums. This applies if they are not eligible for an employer-sponsored health plan. This deduction is taken as an adjustment to income on IRS Form 1040, Schedule 1, Line 17. It reduces your adjusted gross income (AGI) and is available whether you itemize or take the standard deduction.

Another option is to itemize medical expenses on IRS Schedule A. This allows taxpayers to deduct unreimbursed medical expenses, including health insurance premiums not already deducted as self-employed, and out-of-pocket costs for EHB services like co-payments, deductibles, and prescription medication. Only the amount of these expenses exceeding 7.5% of your AGI is deductible. For instance, if your AGI is $50,000, the first $3,750 of qualified medical expenses are not deductible; only amounts above this threshold can be claimed.

Deductibility for Businesses

Businesses can deduct health insurance premiums paid for their employees, including those for plans covering Essential Health Benefits. Premiums paid by an employer for employee health insurance are considered ordinary and necessary business expenses. These amounts are fully deductible by the business, reducing its taxable income. This applies broadly across various business structures, though the specific reporting can differ.

Small employers may qualify for the Small Business Health Care Tax Credit, which helps offset health coverage costs. This credit is available to eligible small employers that pay at least half of their employees’ health insurance premiums through a Small Business Health Options Program (SHOP) Marketplace. To qualify, a business must have fewer than 25 full-time equivalent employees, pay average employee salaries below a certain threshold (e.g., around $56,000 per year), and contribute at least 50% of the premium costs for full-time employees. While this is a credit rather than a deduction, it directly reduces the business’s tax liability and serves as a significant incentive for offering health benefits.

The treatment of health insurance deductions can vary slightly depending on the business structure. For sole proprietorships, premiums paid for employees are typically deducted on Schedule C. Partnerships report these expenses on their Form 1065, with partners potentially deducting their share of premiums on their individual returns. S corporations and C corporations typically deduct these premiums as employee compensation or benefits on their respective tax forms, such as Form 1120-S or Form 1120.

Claiming Your Deductions

After determining which health-related expenses are deductible, the next step involves properly reporting them on your tax forms. For individuals, the self-employed health insurance deduction is reported on IRS Form 1040, Schedule 1, Line 17. This deduction reduces your Adjusted Gross Income (AGI).

Individuals claiming medical expense deductions must itemize on Schedule A (Form 1040). The total qualifying unreimbursed medical and dental expenses are entered on Schedule A, where the 7.5% AGI limitation is applied. Only the amount exceeding this percentage contributes to your total itemized deductions. It is important to ensure that your total itemized deductions surpass your standard deduction to realize a tax benefit from these medical expenses.

For businesses, reporting health insurance premium expenses depends on the entity type. Sole proprietors report employee health insurance premiums on Schedule C (Form 1040). Partnerships report these expenses on Form 1065. C corporations use Form 1120, while S corporations use Form 1120-S. The Small Business Health Care Tax Credit is claimed by eligible employers on IRS Form 8941.

Record Keeping for Deductions

Accurate and organized record-keeping is fundamental for substantiating any tax deductions related to health expenses. Taxpayers should retain all documentation that proves payment and eligibility for the deductions claimed. This includes premium statements from your health insurer.

For those who purchased health insurance through a Health Insurance Marketplace, IRS Form 1095-A is a crucial document. This form provides information about your coverage, monthly premiums, and any advance payments of the premium tax credit received, which is necessary for reconciling your premium tax credit on Form 8962. Explanation of Benefits (EOB) statements from your insurer, along with receipts for out-of-pocket medical expenses like co-pays, deductibles, and prescription costs, are essential. Bank statements or credit card statements showing these payments can also serve as supporting evidence. Maintaining a clear, categorized system for these records, whether digital or physical, is a sound practice in case of an Internal Revenue Service inquiry or audit.