The 2010 Healthcare Reform Act has brought many changes to the health insurance system. In this edition of Financial Friday, let’s discuss what it all means to the professional nanny.
One of the goals of the new legislation is to help millions of Americans obtain coverage. To do that, Congress has created new tax breaks to incentivize employers to contribute toward their employee’s health insurance. Now, in addition to health insurance contributions by employers being non-taxable compensation (no taxes for you or your employer on that portion of the compensation), employers who pay for at least half of their employee’s health insurance premium will be able to take a tax credit of up to 35% on each dollar they contribute.
So, if you have a health insurance policy – or you’re considering purchasing one – talk to your employer about structuring the payroll to maximize the tax breaks and, therefore, minimize the cost for both of you.
An example to illustrate:
Pamela is currently paid $30,000 in taxable wages. After taxes, her “take-home” income is roughly $26,000. She is considering a health insurance policy with premiums of $250 per month ($3,000 per year). But that would reduce her disposable income to $23,000, which she feels like she cannot afford.
So she discusses health insurance with her family. Since she’s up for a raise anyway, they consider bumping her compensation by $3,000 so she can afford insurance. But that plan would cost Pamela an additional $500 in taxes and the family would pay an additional $300 in employer taxes. Structured this way, the health insurance premiums would have an after-tax cost of $3,800 per year ($3,000 + $500 in employee taxes + $300 in employer taxes).
Shrewdly, the family opts instead to pay for Pamela’s health insurance premiums. Neither Pamela nor the family has any additional taxes. Plus, the family will get about $1,000 back through the Health Insurance Tax Credit. Now, the $3,000 health insurance plan has an after-tax cost of $2,000 – an $1,800 annual savings simply by understanding tax law.
Even if you end up meeting your family halfway on health insurance, it’s still beneficial to both parties as long as you structure payroll correctly.
If you or your family has any questions, just give us a call. We’re here to help.