How to Save on Taxes When Offering Retirement and Medical Benefits to Your Employees – Part 2 of 2

Last week we talked about what the Employee Retirement Income Security Act (ERISA) is and how it can impact your business. This week we are covering how it affects the health benefits and retirement plans that you offer your employees.


Small businesses are not always required to provide health insurance, but if you have more than 50 full-time equivalent (FTE) employees, the Affordable Care Act (ACA) does require you to offer minimum essential coverage. 

Important: An FTE is someone with 30 or more hours of service per week or 130 hours of service in a month. The number of FTEs in an organization is the total of full-time and part-time employees. 

If you have two or more employees, ERISA requires you to offer a group-sponsored health plan: 

–       Group-sponsored health plans can include medical, dental, vision, disability, and other insurance plans.

–       To meet the non-discrimination guidelines, you must be able to demonstrate that:

o   At least 70% of all non-excludable employees benefit from the health plan, or

o   At least 70% of all non-excludable employees are eligible to benefit, and at least 80% of those eligible participate in the plan

These categories of employees can be excluded from healthcare benefits without violating the ERISA non-discrimination rules:

–       Employees who have not completed three years of service

–       Employees who are less than 25 years old

–       Part-time or seasonal employees

–       Employees whose coverage is provided under a collective bargaining agreement (e.g., union employees)

–       Non-resident aliens with no U.S. source income (from work done within the U.S.) from the employer

A health plan could be considered discriminatory if it does not offer coverage to eligible individuals or if it offers more or better benefits to highly compensated employees. 

For healthcare plans, the IRS defines a highly compensated employee as:

–       An individual who is one of the five highest-paid officers

–       A shareholder who owns more than 10% in value of the stock of the employer, or

–       An individual who is among the highest paid 25% of all employees (not including employees eligible to be excluded)


ERISA also applies to pension, retirement, and profit-sharing plans that benefit at least one employee. However, there’s an exemption for plans that provide benefits only to you (aka the owner!) and your spouse and in the case of a sole shareholder or a sole shareholder and their spouse. 

ERISA-qualified plans come with additional administrative compliance and provide valuable protection for you. 

Under the law, many part-time employees will be eligible to participate in ERISA-qualified plans because of the recent Setting Every Community Up for Retirement (SECURE) Act. SECURE requires you to offer participation to “long-term” part-time employees. 

–       Qualifying employees are those who worked at least 500 hours per year in at least three consecutive years starting in 2021. 

–       The Act requires employers to allow eligible long-term part-time employees to make tax-deferred contributions to the employer plan. However, it does not require employer contributions for those employees.

You need to note that ERISA-qualified retirement plans risk becoming “top-heavy” or exceeding the requirements for benefits provided to highly compensated individuals. When this occurs, the plans are considered discriminatory under the law. 

For retirement plans, a highly paid employee is an individual who:

–       Was a 5% owner at any time during the year or the preceding year

–       Received compensation from the employer of more than $130,000 (the 2021 threshold, indexed for inflation), and

–       Was in the top-paid group of employees for the preceding year, assuming the employer offered an ERISA-qualified plan during that year

Top heaviness increasingly is likely as the executive and worker compensation gap widens.

Advance planning is critical for small business owners—For the help and expertise you need, contact a certified tax planner today! And to receive even more information on this and get tax strategy worksheets you can take to your CPA look into our DeTax University program.  We want to help you find as many ways to save money on taxes as you legally can!