A family child care provider writes:
>My husband is no longer working and does not have medical insurance coverage. We are in the process of getting a family plan through Kaiser, through the business. My question is do we need sign up for a HSA (Health Savings Account) or can we get a regular family plan not under a business plan? I want to make sure I sign up for the right one, so that we will be able to write off the cost on our taxes. Please advise.
Actually, I don't expect that you will be able to get a health plan under the business name. My understanding is that Kaiser business health plans require something like 3 full time employees (and I assume that other insurers have similar restrictions).
Most sole proprietors obtain individual (or family plan) insurance that's not related to the business. It doesn't make any difference tax-wise, because, either way, the cost of your own health insurance (and your family's health insurance) is not a business deduction. Only employee health insurance premiums can be a business deduction. (See my note below.)
This is not to say you don't get to deduct your health insurance premiums, but it is done on the front of your tax return (Form 1040), not on your business Schedule C. So it is a tax deduction, but not a business tax deduction. This means that your family's health insurance premiums reduce your income tax, but not your self-employment tax.
Special for tax year 2010: Self-employed health insurance premiums can be used as a business deduction on your Schedule C. Thus, for 2010 only, health insurance premiums will reduce income tax AND self-employment tax. This will result in significant tax savings for many sole proprietors, including child care providers.
The HSA question is really separate from the question of business plan vs. family plan. Kaiser has HSA-qualified plans and non-HSA plans. Your choice there is really about what type of coverage you prefer. HSA plans have higher deductibles and allow you to save for your out-of-pocket medical expenses in a tax-deductible account. I opted for an HSA plan a couple of years ago, in order to pay a lower premium. One thing I do notice now, however, is that I'm sometimes reluctant to seek treatment, since I have to pay for it myself (up to the deductible amount).
NOTE: It is possible to hire your spouse to work in your business and provide a health insurance benefit. With a medical reimbursement plan, you can to turn your family's health insurance premiums and out-of-pocket medical expenses into a business tax deduction. See Tom Copeland's explanation of how this works. You should seek help from a benefits consultant in setting up such a plan. One company offering health reimbursement arrangements is TASC, though I so far have no actual experience with this company. Because you can't discriminate, if you have other employees, I assume you will have to cover them, too.
Last updated 26 April 2011