State mandates push employee health coverage

What if you were required by law to offer health benefits for employees?

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

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

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 healthcare 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 about 25 percent.

The good news for many veterinary practices 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 10 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 healthcare initiative, it raises an interesting question: Can your veterinary practice afford to offer health insurance to its employees?

Insuring the masses

Soaring premiums and the so-called Medicare gap has left an estimated 44 million Americans uninsured. Health insurance is also rapidly becoming far too expensive for many large employers that traditionally provided full coverage for their employees (related story).

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 healthcare insurance rather than not offering it.

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

That deduction for self-employed veterinarians applies to spouses and dependents, too. The deduction is limited to the veterinarian'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 plans, 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 his or her employer or his or her spouse's employer.

High-deductible plans

On average, premiums decrease by 10-percent to 30-percent when the deductible jumps from $500 to $2,000, 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 veterinary practice can help mitigate the financial burden by contributing part of the money saved on premiums into a Health Savings Account (HSA) for each worker.

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 veterinary practices as well as self-employed veterinarians can take advantage of Archer Medical Savings Accounts (MSAs) to pay healthcare expenses — provided, of course, that the accounts are held in conjunction with "high-deductible" health insurance. Archer MSAs, similar to IRAs, are created solely to defray unreimbursed healthcare 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 limit, Congress extended the ability to establish an MSA through 2005 — or the time when the threshold 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 of whom?

Under our tax rules, contributions by an employer (through insurance or otherwise) to provide 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 veterinary practice 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, a principal-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, more than 2-percent of the shareholder's wages from the S-corporation are treated as earned income derived from the practice 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.

Offering health insurance coverage for employees remains an expensive option for most veterinary practices; for others it is simply unaffordable. Under our tax laws, the IRS allows small businesses to reimburse their employee for medical expenses. The veterinary practice 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 veterinary practice. 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 veterinary practices that employ them — as well as the principals in those practices.

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. The current environment of change means it's a pretty good time to examine different options for the employees of your veterinary practice, and the tax deductions that just might help make it an affordable option for the practice — and you, its principal or owner.

Mr. Battersby is a financial consultant in Ardmore, Pa.