Although the recently enacted health reform legislation will impose penalties on certain businesses for not providing coverage to their employees, most of our medical and dental client practices will not have to worry. That’s because they are considered “small business employers” who employ fewer than 50 employees and aren’t subject to the so-called “pay or play” penalty.
However, even though you may not be required to do so, the competition for good employees may necessitate that you give consideration to offering your employees such benefits. This is especially true if your employees are going to be required to have insurance.
Let’s take a look at key provision of the legislation that we will look to utilize in our year-end tax planning efforts with clients: Tax credits to certain small employers that provide insurance.
A New Tax Credit
The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees.
The credit can offset an employer’s regular tax or its alternative minimum tax (AMT) liability.
How to Qualify
To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost.
The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000.
However, the full amount of the credit is only available to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000.
Two Phases of the Tax Credit
The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013.
To claim the tax credit during this first phase, health insurance coverage must be purchased from an insurance company licensed under state law.
For tax years beginning after 2013, phase two of the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years.
This maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.
For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s non-elective contributions toward the employees’ health insurance premiums. The credit phases out as business-size and average wages increase.
Example
Keep in mind that there are some special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit.
For example, if an eligible small employer pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 35% of that cost (for the tax year 2010), the employer can only claim a deduction for the other 65% of the premium cost.
Other Exceptions
Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit.
There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.
Helpful Resources
To determine your potential tax credit for 2010, you can review and fill in the Health Care Credit Worksheet. Or, if you complete my Health Care Credit Questionnaire prior to July 1st, I will send you a complementary computation for your review and to help you mind your own business.
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