Health Care Tax Credit
With the passing of the Patient Protection and Affordable Care Act in March, many small businesses and tax-exempt organizations that provide health insurance coverage to their employees may now qualify for a special health care tax credit. The credit, available this year, is designed to encourage small employers to offer health insurance coverage for the first time or to help maintain presently offered coverage. The decision to offer health and other employee benefits is clearly a much larger consideration than what new tax incentives may be available. Offering health coverage is best evaluated when keeping in mind corporate citizenship, a company’s ability to attract and retain quality workers, as well as the financial pros and cons. Those considerations are each wildly important but too wide in scope for complete analysis here. So, this post’s discussion will be limited to the more immediate tax implications for small business as a result of the Act.
To incent companies to get new or retain existing health insurance coverage, now up to 35% of premiums paid in 2010 through 2013 by eligible small business employers and 25% of premiums paid by eligible tax-exempt employers are available as a tax credit. In 2014, the maximum credit increases to 50% for small business employers and to 35% for tax-exempt employers.Eligible employers are those small businesses and tax-exempt organizations who have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Many businesses will qualify even if they employ more than 25 individual workers because the eligibility formula is based, in part, on the number of FTEs rather than the actual number of employees.
Employers whose work force consists of primarily low and moderate income workers benefit most from the Act’s provisions. The maximum credit goes to smaller employers, those with 10 or fewer FTEs, paying annual average wages of $25,000 or less. Those smaller employers are eligible for the full credit. Employers who employ between 11 and 25 full-time equivalent employees with average annual wages of between $25,000 and $50,000 are eligible for the credit, but at a reduced amount, based upon a sliding-scale eligibility formula. Business owners and relatives of owners are excluded from the formula’s FTE calculations allowing for more potential participants.
Besides the FTE and average wage qualifications, the credit is only available to employers that pay at least half the cost of single coverage for their employees. The single coverage stipulation means that while employees may opt for more expensive coverage plans offered by the employer, such as spousal or family coverage, the employer will qualify for the credit as long as the employer pays 50% of the premium for what would have been the single coverage for that employee. For example, if an employee’s single coverage premium totals $5,000 but the employee elects family coverage with an $8,000 annual premium, the employer will meet this stipulation as long as the employer is paying $2,500 or more of the employee’s coverage. While the employer is paying less than 50% of the total premium for the coverage the employee has elected, they’re covering half or more of the single employee’s premium option, and if they also meet the FTE and wage qualifications, they would qualify for the credit.
Bringing this altogether, a machine shop employing 10 full-time workers excluding the owner, paying $25,000 in average wages, and spending $50,000 in total employee health care costs in a plan covering 50% of the total employee premiums would qualify for a 35%, or $17,500, health care tax credit this year. The remaining $32,500 ($50,000 total expense - $17,500 credit) in health care costs is additionally tax deductible just as these expenditures have been in the past. In 2014, this same machine shop’s tax benefit will increase to a $25,000 credit.
The decision to offer health benefits is a weighty one for many business owners. Looking closely at this important tax credit may help alleviate some of that burden. This computation is seemingly simple, but can quickly become complex. As such, business owners should seek counsel to help them balance these new financial incentives with their company’s social, employment, and financial goals.
Comments
Post has no comments.