How Human Resources Can Be a Hero to Business Owners

Leveraging IRS Code Section 213(b) for Medical Expense Deductions and Employee Retention

In today’s competitive business landscape, attracting and retaining top talent is essential for any business to thrive. At the same time, business owners often face the challenge of managing increasing healthcare costs and finding ways to reduce tax liabilities. This is where Human Resources (HR) can step in as a true hero. By introducing tax-deductible health benefits under IRS Code Section 213(b), HR professionals can provide a significant financial advantage to business owners while simultaneously improving employee retention, particularly for key employees.

The Challenge: Difficulty of Writing Off Medical Expenses for Business Owners

Business owners frequently struggle to write off medical expenses through their business, even when they personally shoulder the burden of out-of-pocket medical costs. The standard method for deducting medical expenses through personal income taxes is notoriously restrictive. Under IRS regulations, individuals can only deduct medical expenses that exceed 7.5% of their adjusted gross income (AGI). For many business owners, reaching this threshold is difficult, and the tax benefits are minimal. This means that most out-of-pocket healthcare costs, even for major expenses, are effectively non-deductible.

Moreover, business owners often bear the cost of high premiums, co-pays, and deductibles for themselves and their employees, which can quickly add up. Without a proper structure in place, these expenses remain a significant financial burden that cannot be written off against business income. This is where the HR department can make a tremendous impact by implementing a strategy that allows these expenses to be deducted through the business.

The Solution: Utilizing IRS Code Section 213(b)

Under IRS Code Section 213(b), business owners have the opportunity to set up a tax-deductible health reimbursement program that covers out-of-pocket medical expenses. This section of the tax code allows a business to establish a program that reimburses medical expenses for certain employees, including the owner, in a tax-advantaged way.

With this program, the business can deduct the reimbursements as a business expense, and the reimbursements themselves are not considered taxable income for the employee. This provides a dual benefit: the business reduces its taxable income, and employees receive reimbursement for medical expenses without it being counted as wages.

This approach is particularly advantageous for business owners who typically struggle to write off out-of-pocket medical expenses on their personal tax returns. By routing these expenses through the business as part of a structured plan, owners can deduct the full amount, lowering their overall tax liability.

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HR’s Role: Implementing and Promoting the Benefit

HR professionals play a pivotal role in designing and promoting this health reimbursement program. They can guide business owners through the complexities of setting up a compliant reimbursement plan under IRS Code Section 213(b), ensuring that it adheres to tax regulations and benefits both the business and the employees.

To maximize the impact, HR can target this benefit toward key employees—those whose retention is critical to the company’s success. Offering a health reimbursement plan that covers out-of-pocket expenses can be an invaluable tool in retaining high-value employees, especially in competitive industries where medical benefits are a major factor in job satisfaction.

For example, a company might offer this benefit to its senior management team or other vital personnel whose expertise is essential to the company’s long-term growth. By providing an additional layer of financial security in the form of out-of-pocket medical expense reimbursements, HR helps ensure these employees stay loyal to the company. This reduces turnover, recruitment costs, and disruptions to business operations.

The Bottom Line: HR as a Strategic Asset

In the end, HR can be the hero that business owners need by introducing a program that serves dual purposes: allowing business owners to deduct out-of-pocket medical expenses and using the same benefit to retain key employees. Through the strategic use of IRS Code Section 213(b), HR can help the company reduce its tax liability, increase financial flexibility, and create a more attractive benefits package for top talent.

This proactive approach transforms HR from an administrative function into a strategic asset. By leveraging tax law to the business’s advantage and enhancing employee satisfaction, HR can help secure the long-term success of the business while making life easier for its owner.

In a world where the costs of healthcare continue to rise and employee retention becomes increasingly important, HR’s ability to introduce and manage such a tax-deductible benefit truly positions it as a hero for both business owners and employees alike.

Contact us for a proposal on this option for your Business Owners or Key Employees at www.holisticeb.com/appt

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