FAQs: Small Employer Tax Credit Available Under the Federal Patient Protection and Affordable Care Act

FAQs: Small Employer Tax Credit Available Under the Federal Patient Protection and Affordable Care Act https://wahospitality.org/wp-content/uploads/2013/02/moneyfork-388x198.jpg

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The federal Patient Protection and Affordable Care Act provides tax credits to qualifying small employers that choose to provide health care coverage to their employees.  While the federal law does not require employers with 50 or fewer full-time equivalent employees to provide coverage, they have established this tax credit as an incentive for qualified small employers interested in doing so.  The credit is available to small employers with fewer than 25 full-time equivalents that pay less than $50,000 in average annual wages, and is available from 2010 through 2016.  Those accessing the credit prior to 2014, are allowed a credit of up to 35% of the cost of the coverage the employer provided.  After 2014, small employers choosing coverage in a state-based health exchange, are eligible for a tax credit of up to 50% of the cost of coverage, while those that continue with coverage in the private market will be able to continue accessing the up to 35% tax credit.

Which small employers are eligible for the tax credit?

To qualify for the tax credit, the employer must employ 25 or fewer full-time equivalent employees and pay less than $50,000 per year in average annual wages.

Am I guaranteed a credit of 35% of the cost of the coverage I provide?

No.  The value of the credit is determined on a sliding scale.  The more FTEs you have and/or the higher your annual wages are, the lower the credit you will receive.  The credit is completely phased out for those that have 25 FTEs no matter what they pay in annual wages, and also for those that pay $50,000 or more in annual wages, no matter how many employees they have.

Is the credit based on the total cost of the premium or just the amount I as the employer pay toward the premium?

The value is based on the amount you as the employer contribute to the cost of employee only coverage and requires that the employer must pay at least 50% of the cost of the coverage.

Do I use the same method of determining FTEs as that used to determine my employer size for the employer responsibility provisions?

Unfortunately, no.  The IRS wants employers to use the following process to determine their employer size for this tax credit:

  • Add up the total hours of service for which you paid wages to employees during the year (but not more than 2,080 for any one employee).  Divide the total hours by 2,080.  If the result is not a whole number, round down to the next lowest whole number.
    • Note that total hours of service include each hour for which an employee is either paid or entitled to be paid (ie, vacation, paid holidays, etc), during the employer’s tax year.   Be sure to include all hours of paid leave in the calculation above (but not more than 160 hours of entitled to be paid/leave hours per employee).
  • Employers are allowed to exclude hours paid to:  a partner in a partnership; a shareholder owning more than 2 percent of an S corporation; owners owning more than 5 percent of the business; and family members of the owner, qualifying partner or qualifying shareholder, from the calculation above.
  • After the calculation, employers with more than 25 FTEs will be ineligible for the tax credit

How do I determine average annual wages?

The IRS recommends that you use the following to determine average annual wages:

  • Add up the total wages paid by the employer to qualifying employees during the tax year.  Divide by the number of FTEs for the year.  Round down to the nearest $1,000 (if not a multiple of $1,000).  Include only wages paid for hours of service, using the definition of wages provided by the Federal Insurance Contributions Act (FICA) (without regard for the wage base limitation).
    • Exclude wages paid to:  a partner in a partnership; a shareholder owning more than 2 percent of an S corporation; owners owning more than 5 percent of the business; and family members of an owner, qualifying partner or qualifying shareholder.

I have 22 FTEs but only 6 of them are enrolled in the health plan I offer.  Do I calculate the hours worked and annual wages of just these six employees to determine my eligibility for the credit?

No, you must calculate the hours worked and annual wages of all employees to determine eligibility, not just those of employees enrolled in your health plan.

What if I pay different premium amounts for employee and employee plus dependent coverage – do I aggregate the costs of both to determine total premiums paid?

It depends.  You may only count costs attributed to employee only coverage.  However, if you as the employer contribute a higher amount to employee plus dependent coverage than you do to employee only coverage , you may attribute an employee only cost for those employee’s accessing employee plus dependent coverage.  If you contribute less but are still paying at least 50% of the premiums for the employee plus dependent coverage, you may count the exact amount contributed.  However, if you pay less than 50% of the employee plus dependent coverage, you may not count any of the premium amount you contributed to the cost of their coverage.

Can I include amounts contributed to an HRA in the overall cost of premiums?

No.  Employers may not include employer contributions to health reimbursement arrangements (HRAs), health flexible spending arrangements (FSAs), or health savings accounts (HSAs) in the calculation of premiums paid.

I also provide dental coverage.  Should I include the cost of this coverage in the calculation of premiums paid?

Yes, costs of standalone dental and vision health plans may be included in the calculation of premiums paid.

I provide a very rich benefit package to my employees.  Will my generosity exclude my ability to access a premium credit?

No, it will not preclude your eligibility but the law caps the amount an employer can claim for premiums paid by establishing an average premium allowance in each state.  All amounts paid beyond the cap will be disregarded by the system as the credit is calculated.  While you will still be eligible for the credit, the credit may not be as high as you initially calculate once the premium cap is taken into consideration.

Are there any downsides to accessing this credit?

Potentially.  The amount of the tax credit must be subtracted from the existing deduction employers already receive for providing health care coverage (employers are allowed to deduct the value of health care coverage provided to their employees).  If an employer is in a situation where the amount of the deduction is what determines whether the employer will pay additional federal taxes of not, subtracting the amount of the tax credit from the deduction amount could force that employer to pay more in federal taxes than they would pay had they not applied for the credit.

If I access the up to 35% tax credit this year, am I eligible for the up to 50% tax credit next year?

Potentially.  The up to 50% tax credit is available for those employers that purchase health care coverage in the state-based exchange.  If you are currently providing health care coverage, you are purchasing that coverage from the private health insurance market, not the new government program.  In order to access the higher tax credit amount, you will need to drop the private market coverage you have now, and purchase coverage from the new state exchange in 2014.

If I choose to keep my private market health care coverage, will I still be eligible for a tax credit in 2014? 

Yes, employers that choose private market health care coverage are eligible for the tax credit of up to 35% of premium costs through 2016.

I am just learning about this tax credit and have provided health care coverage for years.  Is there any way I can apply for the credit on past returns?

Potentially.  The law does allow you to submit amended tax returns to take advantage of the credit.  You should consult with your accountant or tax adviser to see whether you would benefit from accessing the credit on past returns.

 Donna Steward, President, Kiawe Public Affairs

 This publication is intended to inform employers about  provisions of the Patient Protection and Affordable Care Act and how those provisions may affect them.  This information should not be construed as legal  or tax advice, and readers should not act upon the information contained therein without professional counsel.

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