by Bill Sweet
We believe that it is our professional obligation to analyze the effects in an effort to give our clients unbiased advice on this and all topics. The tax law is the tax law after all. We also feel that it's a bit of a moving target - the secondary and tertiary consequences of this legislation will continue to be reviewed for the next few tax years.
There are some tax positive effects of the ACA, and if your small business offers employee health insurance benefits, you may qualify for refundable tax credits under provisions of the 2010 Affordable Care Act. These credits were available beginning in tax year 2013 but expanded in 2014 to a maximum of 50% of the health insurance premiums paid during the tax year (not-for-profit businesses can qualify for a maximum 35% credit, even if not required to file Form 990).
In order to qualify, your business must meet these three criteria for 2014:
1)
You must have paid premiums for employee health insurance coverage under a qualifying arrangement. Generally, this means that you must have paid a uniform percentage (more than 50%) of your enrolled employee’s health insurance premium for the year. These premiums must generally be paid through the Small Business Health Options Program (SHOP) Marketplace. You must reduce your deduction by the amount of any advance credits received from small employer health insurance. The average health insurance premium per county is published by the IRS. For example, Orange County’s average premium for 2014 was $5,930 per year for single coverage and $14,849 for family coverage, thus the employer portion of employee health insurance must exceed $2,965 and $7,425 (Rockland County average premiums for 2014 were slightly higher at $6,884 and $17,754, respectively).
2)
You had fewer than 25 full time equivalent (FTE) employees. A full-time employee is generally considered someone who works an average of 40-hours per week during the calendar year. This does not necessarily mean 25 employees total, but rather the equivalent of 25 employees who work a full 40-hour week. Thus, if you have two employees that average 20 hours per week for the year, the sum of both employees results in only one FTE. Employers who have 10 FTEs are eligible for the full 35% credit, but the credit is reduced for employers who have 11-25 FTEs. At 26 FTEs, the credit is reduced to zero.
3)
Your average wages paid for 2014 must be less than $51,000 per FTE. The total wages paid for the year are totaled, and then divided by the number of FTEs calculated in requirement #2. If wages are less than $25,000 per FTE, the employer qualifies for the full 50% credit (as long as the conditions for #2 are fully met – these are calculated separately). The credit is reduced for employers whose average FTE wage falls between $25,000 and $51,000, and it is reduced to zero if average FTE wages is more than $51,000.
Organizations that meet these criteria must file Form 8941 (Credit for Small Employer Health Insurance Premiums) to obtain the credit. The total amount of the credit, up to 50% of the total premiums paid, should be calculated first on Form 8941 and then as a general business credit on Form 3800. The credit is available for two years.
To demonstrate how the credit is calculated, here are four examples:
1)
An Orange County business had eight employees that worked an average of 40 hours per week in 2014 (8 x 40 = 8 FTEs), and two employees that worked an average of 20 hours per week (2 x 20 = 1 FTE), for a total of nine FTEs. Total wages for the business were $240,000, so average wages of $24,000 per employee ($240,000 / 10). Through the SHOP Marketplace, the business paid $5,000 in premiums toward individual coverage for five employees and $8,000 in premiums toward family coverage for five employees, which exceeded 50% of the Orange County averages of $2,965 and $7,425, respectively. Because the business met the requirements for all three criteria they are eligible to receive a tax credit of 50% of total premiums paid of $65,000 ($5,000 x 5 + $8,000 x 5), or $32,500.
2)
A small Rockland County business had 10 employees in 2014, two of which worked an average of 40 hours per week (2 FTEs) and eight of which worked an average of 10 hours per week (8 x 10 = 2 FTEs), for a total of four FTEs. Total wages paid by the business were $375,000, so average wages of $37,500 per employee. Through the SHOP Marketplace, the business paid $10,000 per employee toward family coverage for all 10 employees, which exceeded 50% of the Rockland County average for family plans of $8,877. Because the business met the requirements for all three criteria they are eligible to receive a tax credit of 25% of total premiums paid of $100,000 ($10,000), or $25,000. Note that they were not eligible to receive the full 50% credit because their average wages paid was $37,500, which exceeded the full credit threshold of $25,000 per employee.
3)
A very small Orange County library is staffed only by four employees, two of which worked 40 hours per week (two FTEs) and two of which worked 20 hours per week (one FTE) for a total of three FTEs. Total wages paid by this generous library were $300,000, so average wages were $100,000 per FTE. This library would not be eligible for a tax credit because their average wage exceeded $51,000.
4)
A Rockland County business has 50 employees, 20 of which worked an average of 40 hours per week (25 x 40 = 20 FTEs) and 30 of which averaged 25 hours per week (30 x 25 / 40 = 19 FTEs), for a total of 39 FTEs. Because the business employed more than 25 FTEs, they are not eligible for a tax credit on Form 8941.
We are still unraveling all of the implications of the Affordable Care Act, and it will take some time to gain a full and complete understanding of all of the drawbacks and benefits of the law even within the narrow confines of the tax code. If your business employees 25 full time equivalent employees or less, and pays for a portion or all of your employee health insurance premiums, it is worth looking into this credit for two reasons. First, the high cost of health insurance ($18,000 per employee per year on average in Rockland County), and second the high percentage of the credit (50%).
For more on the subject, the Journal of Accountancy goes into even deeper detail here.
- Bill
Important disclosure:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact the author if you wish to have formal written advice on this matter.
