Updated December 1, 2013: Just when I thought the dust was settling, navigating the federal healthcare reform landscape has become even more daunting and confusing. On Thanksgiving eve (2013), the Department of Health and Human Services announced a delay that impacts small businesses’ ability to apply online for coverage using the SHOP exchange marketplace as mentioned in my November 27 and November 16 blog posts on Navigating the Affordable Care Act. What this delay means is that small businesses won’t be able to use the Federal website to apply for/enroll in coverage through the SHOP exchange for their employees, if they do choose to offer coverage to their employees. They will instead have to apply in writing, in person or through an insurance broker or agent.
On Wednesday, November 27, 2013, the Department of Health and Human Services said the agency is immediately opening up direct enrollment in the SHOP program through agents, brokers and insurers in states that let the federal government run their exchange. If your state runs its own exchange (E.g., California) you need to use your state’s exchange.
The announcement was made in a post on the Department of Health and Human Services blog, entitled “A Direct New Path to SHOP Marketplace Coverage.” It states:
For small businesses in states with a SHOP Marketplace that’s run by the federal government, we are making changes to make sure that you can take advantage of SHOP coverage and the tax credit as soon as possible. Specifically, for 2014, small employers will enroll their employees in coverage through an agent, broker, or insurer that offers a certified SHOP plan and has agreed to conduct enrollment according to HHS standards.
What to do… If your business is located in a state that does not have its own SHOP exchange, and you want to qualify for the Small Business Health Care Tax Credit, talk to a qualified insurance broker.
In our continuing series of blog posts on navigating the Affordable Care Act (ACA), we will be focusing this week on the tax credit available for small businesses. Before we jump into the technical speak, I wanted to recap a couple key requirements for employers. With all the recent press and upheaval in the news, it’s not surprising a survey by Zane Benefits reported that 56% of small businesses don’t understand health care reform and are confused about the employer mandate. In short, under the ACA:
- Employers who have at least one employee and at least $500,000 in annual dollar volume of business, must notify their employees about the new Health Insurance Marketplace; inform employees that they may be eligible for a premium tax credit if they purchase coverage through the Marketplace; and advise employees that if they purchase a plan through the Marketplace, they may lose the employer contribution (if any) to any health benefits plan offered by the employer.
On the flip side,
- Small businesses with less than 50 full time equivalent employees (FTE’s) are not subject to the employer mandate (and tax penalties) to offer qualified, affordable health insurance to employees. The notification above is the only requirement.
- In fact, if you have fewer than 25 FTE’s, you are not only exempt from penalties, but you may be eligible for a small business healthcare tax credit, designed to encourage small employers with lower-income workers to offer health insurance coverage for the first time or maintain coverage they already have. Read more below.
Confused? You’re certainly not alone. “Navigating the federal healthcare reform landscape can be a really daunting task.”
In my prior post on the ACA, I briefly mentioned the ACA tax credit for small businesses providing health care for their employees obtained from the insurance exchanges via the Small Business Health Options Program (SHOP). The below is an in depth discussion of the credit and a summary of information provided by the IRS on how to obtain the credit.
The technical speak:
- An employer’s tax credit depends on the number of FTE’s ,
- the average annual wages of all employees employed and,
- the amount spent on insurance premiums.
Tax credits (which have been available since 2010) become more generous starting in 2014. The IRS code provides that for taxable years beginning in or after 2014, the credit will be allowed for a two consecutive taxable year periods beginning with the first taxable year in which the employer offers coverage to its employees through a state health exchange (“SHOP”).
In tax year 2014, the maximum tax credit increases to 50 percent of premium expenses and coverage must be purchased from a state health insurance exchange. (Due to the problems with the federal website, there is a possibility that the President may permit signups directly through insurance providers. I’m unsure how this will effect the SHOP signup requirement. )
Employers with 25 or fewer FTE’s are technically eligible for tax credits if all other criteria are met. However, at 25 FTEs, the tax credit is completely phased out.
Who Is Eligible?
You are eligible for a tax credit if you:
- Cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees
- Have fewer than 25 FTE’s
- Those employees must have average wages less than $50,000 (as adjusted for inflation beginning in 2014) or less per year
- Purchased your insurance through the SHOP Marketplace to be eligible for the credit for tax years 2014 and beyond
What is the definition of an FTE?
Two half-time workers count as one FTE. That means 20 half-time employees are equivalent to 10 FTE’s.
Which Employees are included in the count of FTE’s?
All of your employees are included with the exception of the following:
- The owner of a sole proprietorship
- A partner in a partnership
- A shareholder who owns more than 2% of an S corporation
- A shareholder who owns more than 5% of the outstanding stock or stock possessing more than 5% of the total combined voting power of all stock of a non-S corporation
- A person who owns more than 5% of the capital or profits interest in any other business that is not a corporation
- Family members or a member of the household who is not a family member but qualifies as a dependent on the individual income tax return of a person listed above.
How do you calculate the average annual wage?
If you pay total wages of $200,000 and have 10 FTE’s, you divide $200,000 by 10 — the number of FTE’s — and the result is your average annual wage.
How much of a credit are you entitled to?
For tax years 2010 through 2013, the maximum credit is 35 percent of insurance premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities.
For tax years beginning in 2014 or later, there will be changes to the credit:
- The maximum credit will increase to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
- To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a SHOP Marketplace.
- The credit will be available to eligible employers for two consecutive taxable years.
Enough of the technical speak, what is the math behind the tax credits and how much can one save?
If you pay $50,000 a year toward workers’ health care premiums — and if you qualify for a 15 percent credit,
you save… $7,500
If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.
- Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Moreover, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit.
- The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.
Check out the IRS Taxpayer Advocate website where you can do a rough calculation of your potential Tax Credit benefit.
How do you claim the credit?
To claim the credit, you must use IRS form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. See the Instructions for Form 8941 for the details. If you are a small business, include the amount as part of the general business credit on your income tax return.
Confused? The tax credit has been touted as an incentive for your small business. I’m curious to know if this is really the case and if in the long run, your business will reap the tax benefits. We would love to hear from you.