Small employers may qualify for a tax credit in connection with providing health insurance to employees.
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How Does Health Care Reform
Apply To Small Businesses?
By Christopher W. Olmsted
Although advocates of the recent federal healthcare reform have emphasized that employers are not mandated to provide coverage for employees, that is only half true. Beginning in January 2014, large employers will be penalized if they do not provide healthcare. What does the new law have in store for small employers?
Large Employer “Mandate”
Beginning on January 1, 2014, employers with more than 50 full time or full time equivalent employees may be subject to penalties for failing to provide health care coverage to full time employees. The penalties will be imposed in the event that an employee obtains subsidized individual health insurance from the soon-to-be-created health care insurance exchange.
If an employer does not provide coverage at all, the penalty will be $2,000 per employee. The penalty will be calculated by multiplying $2,000 times the total number of full time employees, minus 30. (Thus an employer with 70 employees would pay $2,000 x (70-30) = $80,000.
If an employer does provide coverage, but the coverage is insufficient, the penalty will be $3,000 per full time employee who receives subsidized individual coverage or $2,000 per full time employee in entire workforce, whichever is less.
Small Business Exemption
Businesses with 50 or fewer full time or full time equivalent employees will not be subject to these penalties. A full time employee under the new law works an average of 30 or more hours per week in a month.
This exemption will apply to most businesses. According to government statistics, 96 percent of all firms in the United States or 5.8 million out of 6 million total firms – from any employer responsibility requirements. These 5.8 million firms employ nearly 34 million workers.
Small Business Tax Credit
Small businesses, where most employees work, are struggling to provide health care benefits. According to a White House publication, over the past decade, average annual family premiums for workers at small firms increased by 123 percent, from $5,700 in 1999 to $12,700 in 2009, while the percentage of small firms offering coverage fell from 65 to 59 percent.
The recent health care reform offers assistance in the form of tax credits. Small employers with fewer than 25 full-time equivalent employees and average annual wages of less than $50,000 that purchase health insurance for employees are eligible for the tax credit. The tax credit is available for insurance costs beginning January 1, 2010.
The maximum credit will be available to employers with 10 or fewer full-time equivalent employees and average annual wages of less than $25,000. To be eligible for a tax credit, the employer must contribute at least 50 percent of the total premium cost.
(Source: http://www.whitehouse.gov/files/documents/health_reform_for_small_businesses.pdf)
The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
Businesses that receive state health care tax credits may also qualify for the federal tax credit.
In addition to group health care, dental and vision care will qualify for the credit as well.
For 2010 through 2013, eligible employers will receive a small business credit for up to 35 percent of their contribution toward the employee’s health insurance premium.
For 2014 and beyond, small employers who purchase coverage through the new Health Insurance Exchanges can receive a tax credit for two years of up to 50 percent of their contribution.
There will be a cap on the amount of the credit, and this amount will vary state to state. The IRS has published a notice of the initial caps: http://www.irs.gov/pub/irs-drop/rr-10-13.pdf The amounts range from $4,000 to $6,000 per employee.
Calculating FTE and Wages for Tax Credit
The number of an employer’s FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number.
Note that the FTE calculation means that some employers who have more than 25 employees may qualify for the tax credit, because some of the employees may be part time.
The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer’s tax year by (2) the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).
Exclusions From the FTE and Salary Count
A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Additionally, family members or household members of owners do not count as employees. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year.
Additional Resources:
IRS Tax Credit Test
http://www.irs.gov/pub/irs-utl/3_simple_steps.pdf
IRS FAQs For Small Business Health Care Credit
http://www.irs.gov/newsroom/article/0,,id=220839,00.html
White House Publication Summarizing Small Business Tax Credit
http://www.whitehouse.gov/files/documents/health_reform_for_small_businesses.pdf
White House Health Care Reform FAQs For Small Businesses
http://www.healthreform.gov/about/answers.html
Download entire June 2010 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2010 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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