The Affordable Health Care Act (AHCA) is being called the most historic overhaul of the U.S. health care system since Medicare and Medicaid. After its passage, many people believed the law would never go into effect because either the Supreme Court would overturn it or Congress would repeal it. Now that the general consensus has shifted to accepting it will become law, we are hearing about provisions contained in the Act. One that has gone unnoticed by many taxpayers is a credit for small business.
For the AHCA a small employer is defined as an employer with less than fifty full time employees (or more accurately stated less than fifty full time equivalent employees). Whitehouse.gov indicates, “The law specifically exempts all firms that have fewer than 50 employees - 96% 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.” (http://www.whitehouse.gov/files/documents/health_reform_for_small_businesses.pdf)
However, AHCA states that small employers who pay for health insurance for their employees may be entitled to a tax credit for tax years beginning after Dec. 31, 2009. Of course, the cost of providing the health insurance is an ordinary and necessary business expense and a tax-free benefit for the employees. But thanks to a provision in the 2010 Health Care Act, as Amended by the 2010 Health Care Reconciliation Act, some small employers are entitled to a tax credit in addition to the tax deduction. According to sba.gov, “The credit is specifically targeted for those businesses with low and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.”
This is a much welcomed relief to small businesses that pay on average as much as 18% more for the coverage they provide their employees compared to similar policies offered by larger firms, (http://www.whitehouse.gov/sites/default/files/docs/the_aca_helps_small_businesses.pdf). Some industry observers indicate that insurance premiums are expected to increase 10% or more. However, sba.gov indicates in an article dated January 25, 2013 that, “The Affordable Care Act will help small businesses by lowering premium cost growth and increasing access to quality, affordable health insurance.” (http://www.sba.gov/community/blogs/top-three-things-small-businesses-should-know-about-affordable-care-act)
For purposes of this credit, health insurance coverage means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital, medical service policy, medical service plan contract, or any health maintenance organization contract offered by a health insurance provider. A health insurance provider is either an insurance company or another entity licensed under state law to provide health insurance coverage.
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 credit. The maximum credit will be available to employers with 10 or fewer FTE employees and average annual wages of less than $25,000. To be eligible for a tax credit, the employer must contribute at least 50% of the total premium cost. For 2010 through 2013, eligible employers will receive a small business credit for up to 35 % of their contribution toward the employee’s health insurance premium. Small tax-exempt organizations meeting the above requirements are eligible for tax credits of up to 25% of their contribution. In 2014 and later, eligible employers who purchase coverage through the Small Business Health Options Program (SHOP) can receive a tax credit for two years of up to 50% of their contribution. The enhanced credit can be claimed for any two consecutive taxable years beginning in 2014 through the SHOP.
To be eligible for the credit the employer must have paid the premiums under a qualifying arrangement. According to the IRS instructions, “A qualifying arrangement is generally an arrangement that requires the employer to pay a uniform percentage (not less than 50%) of the premium cost for each enrolled employee's health insurance coverage. However, an arrangement that requires the employer to pay a uniform premium for each enrolled employee (composite billing) and offers different tiers of coverage (for example, self-only, self plus one, and family coverage) can be a qualifying arrangement even if it requires the employer to pay a uniform percentage that is less than 50% of the premium cost for employees not enrolled in self-only coverage.”
Certain employees are excluded for purposes of the credit including 2% shareholders, 5% owners, self-employed individuals, and certain individuals related to those individuals. It is presumed that you exclude these employees when determining if the employer has 25 or less FTE and when calculating the average annual wage. Furthermore, the rules require aggregation of controlled groups of corporations and affiliated service groups.
The determination of FTE for the credit is based on 2,080 hours per employee. Therefore, if the employer has part time employees it may be that they still qualify as having less than 25 FTE. Any hours worked by an employee in excess of 2,080 is excluded as you determine the FTEs. Further, you are allowed to exclude seasonal employees but would include part-time employees and any leased employees. The determination of the average wage is the average compensation of just the employees who make up the employees counted in the FTE calculation.
The credit changes for tax years after 2013. After 2013, the credit is only available for small employers that purchase health insurance coverage for its employees through a state exchange and is only available for a maximum coverage period of two consecutive tax years. However, the maximum two-year coverage period does not take into account any tax years beginning in years before 2014.
The credit is also available to small tax-exempt employers who are exempt under section 501(c). The credit available to them is generally 25% of the premium paid and is allowed based on payroll taxes paid. The tax-exempt entity would claim this credit by filing a Form 990-T.
For all other small employers, the credit is generally 35% of premiums paid, can be taken against both regular and alternative minimum tax, and is claimed as part of the general business credit on Form 3800. This credit is calculated on Form 8941. You must reduce your deduction for the cost of providing health insurance coverage to your employees by the amount of any credit for small employer health insurance premiums allowed with respect to the coverage.
According to whitehouse.gov, “These tax credits will benefit an estimated two million workers who get their insurance from an estimated 360,000 small employers who will receive the credit in 2011.” (http://www.whitehouse.gov/sites/default/files/docs/the_aca_helps_small_businesses.pdf)
Furthermore, whitehouse.gov emphasizes one of the goals of the AHCA is to increase the coverage by small employers. “Small businesses are the backbone of our economy, but high health care costs and declining coverage have hindered small business owners and their employees. Over the past decade, average annual family premiums for workers at small firms increased by 123%, from $5,700 in 1999 to $12,700 in 2009, while the percentage of small firms offering coverage fell from 65 to 59%.” (http://www.whitehouse.gov/sites/default/files/docs/the_aca_helps_small_businesses.pdf)
Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at
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