The following provides an overview of the provisions contained in the combined Health Care Acts and its impact on small businesses. Whether, certain tax credits, excise taxes and penalties will apply to your business depends on various factors, such as the number of employees the business has and the average amount of wages paid to those employees.
Tax Credits to certain small employers that provide insurance
The new law provides a tax credit to eligible employers for non-elective contributions to purchase health insurance for their employees. The credit is available to offset an employer?s regular income tax liability or its alternative minimum tax liability.
A qualified small employer is one who has fewer than 25 full time equivalent employees (FTE) for the tax year; and of those employees, the average annual wages for the year must be less than $50,000 per FTE.
In 2010 through 2013, eligible employers may qualify for a tax credit of up to 35% of their non-elective contributions toward the employee?s health insurance premiums purchased from an insurance company licensed under state law. For years after 2013, the credit increases to 50%; however, the insurance must be provided through a state exchange and is only available for two years. However, the full amount of the credit is only available to employer?s who have 10 or fewer employees and whose employees have an average annual FTE wages of no more than $25,000. The credit phases out as employer size and average wages increase.
Who is a qualified employee? It is easier to answer who is not. The following is a list of employees that do not qualify for the tax credit:
· Business owners (sole proprietor, partner, shareholder owning 2% or greater in an S corporation), and any owner of more than five percent of other businesses.
· Family members of the business owners, as noted above. A family member is defined as a child, sibling, and parent. This includes ?step? and ?in-law? relatives.
Spouses are not defined under the definition, as of yet. Although under other areas of the tax law, the spouse is considered an owner.
As noted above, business owners and the premiums paid for their personal and family health care not included in the calculation of the tax credit, nor the calculation of average wages.
Although the law mandates penalties on certain businesses for not providing coverage to their employees, most small businesses won?t have to worry about this, since those with fewer than 50 employees are exempt under the new law. For those businesses over 50 employees, please contact our office for the penalty information.
Starting in 2018, insurance companies and plan administrators, will bear a 40% excise tax, known as the ?Cadillac Tax?, to the extent that the annual premium exceeds $10,200 for single coverage and $ 27,500 for family coverage. Although, this is not a tax that the employers are directly responsible for, it is expected that the insurance companies will pass this cost to the employers and employees in the form of higher premiums.
For assistance in projecting the credit available to your business, or if you would like any other details about these provisions, please contact our office.
California does not conform to the above changes.
© 2010 Cherie D. Putman CPA 5/7/10