Tax changes affecting small businesses in the 2010
health reform legislation
Hello,
For owners of small businesses
and their workers, the recently enacted health reform legislation has
some key provisions to pay attention to. The major ones include: tax
credits; excise taxes; and penalties. But whether a business will be
affected by them depends on a variety of factors, such as the number of
employees the business has. I'm writing to give you an overview of the
provisions in the new law with the biggest impact on small business.
Please call our offices for details of how the new changes may affect
your specific business.
Tax credits to certain small
employers that provide insurance. The new law provides small employers with a tax
credit (i.e., a dollar-for-dollar reduction in tax) for non-elective
contributions to purchase health insurance for their employees. The
credit can offset an employer's regular tax or its alternative minimum
tax (AMT) liability.
Small business employers
eligible for the credit. To qualify, a business must offer health insurance to its
employees as part of their compensation and contribute at least half
the total premium cost. The business must have no more than 25
full-time equivalent employees ("FTEs"), and the employees
must have annual full-time equivalent wages that average no more than
$50,000. However, the full amount of the credit is available only to an
employer with 10 or fewer FTEs and whose employees have average annual
full-time equivalent wages from the employer of less than $25,000.
Years the credit is available. The credit is initially available for any tax year
beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for
claiming the credit for this first phase of the credit is health
insurance coverage purchased from an insurance company licensed under
state law. For tax years beginning after 2013, the credit is only
available to an eligible small employer that purchases health insurance
coverage for its employees through a state exchange and is only
available for two years. The maximum two-year coverage period does not
take into account any tax years beginning in years before 2014. Thus,
an eligible small employer could potentially qualify for this credit
for six tax years, four years under the first phase and two years under
the second phase.
Calculating the amount of the
credit. For tax
years beginning in 2010, 2011, 2012, or 2013, the credit is generally
35% (50% for tax years beginning after 2013) of the employer's
non-elective contributions toward the employees' health insurance
premiums. The credit phases out as firm-size and average wages
increase. Tax-exempt small businesses meeting these requirements are
eligible for payroll tax credits of up to 25% for tax years beginning
in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of
the employer's non-elective contributions toward the employees' health
insurance premiums.
Special rules. The
employer is entitled to an ordinary and necessary business expense
deduction equal to the amount of the employer contribution minus the
dollar amount of the credit. For example, if an eligible small employer
pays 100% of the cost of its employees' health insurance coverage and
the amount of the tax credit is 50% of that cost (i.e., in tax years
beginning after 2013), the employer can claim a deduction for the other
50% of the premium cost.
Self-employed individuals,
including partners and sole proprietors, 2% shareholders of an S
corporation, and five percent owners of the employer are not treated as
employees for purposes of this credit. Any employee with respect to a
self-employed individual is not an employee of the employer for
purposes of this credit if the employee is not performing services in
the trade or business of the employer. Thus, the credit is not
available for a domestic employee of a sole proprietor of a business.
There is also a special rule to prevent sole proprietorships from
receiving the credit for the owner and their family members. Thus, no
credit is available for any contribution to the purchase of health
insurance for these individuals and the individual is not taken into
account in determining the number of full-time equivalent employees or
average full-time equivalent wages.
Most small businesses exempted
from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain
businesses for not providing coverage to their employees (so-called
"pay or play"), most small businesses won't have to worry
about this provision because employers with fewer than 50 employees
aren't subject to the "pay or play" penalty. For businesses
with at least 50 employees, the possible penalties vary depending on
whether or not the employer offers health insurance to its employees.
If it does not offer coverage and it has at least one full-time
employee who receives a premium tax credit, the business will be
assessed a fee of $2,000 per full-time employee, excluding the first 30
employees from the assessment. So, for example, an employer with 51
employees who doesn't offer health insurance to his employees will be
subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers
with at least 50 employees that offer coverage but have at least one
full-time employee receiving a premium tax credit (also allowed under
the new law) will pay $3,000 for each employee receiving a premium
credit (capped at the amount of the penalty that the employer would
have been assessed for a failure to provide coverage, or $2,000
multiplied by the number of its full-time employees in excess of 30).
These provisions take effect Jan. 1, 2014.
The "Cadillac tax" on
high-cost health plans. The new law places an excise tax on high-cost
employer-sponsored health coverage (often referred to as
"Cadillac" health plans). This is a 40% excise tax on
insurance companies, based on premiums that exceed certain amounts. The
tax is not on employers themselves unless they are self-funded (this
typically occurs at larger firms). However, it is expected that
employers and workers will ultimately bear this tax in the form of
higher premiums passed on by insurers.
Here are the specifics: The new tax, which applies for tax years beginning
after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance
companies and plan administrators for any health coverage plan to the
extent that the annual premium exceeds $10,200 for single coverage and
$27,500 for family coverage. An additional threshold amount of $1,650
for single coverage and $3,450 for family coverage will apply for
retired individuals age 55 and older and for plans that cover employees
engaged in high risk professions. The tax will apply to self-insured
plans and plans sold in the group market, but not to plans sold in the
individual market (except for coverage eligible for the deduction for
self-employed individuals). Stand-alone dental and vision plans will be
disregarded in applying the tax. The dollar amount thresholds will be
automatically increased if the inflation rate for group medical
premiums between 2010 and 2018 is higher than the Congressional Budget
Office (CBO) estimates in 2010. Employers with age and gender demographics
that result in higher premiums can value the coverage provided to
employees using the rates that would apply using a national risk pool.
The excise tax will be levied at the insurer level. Employers will be
required to aggregate the coverage subject to the limit and issue
information returns for insurers indicating the amount subject to the
excise tax.
I hope this information is
helpful. If you would like more details about these provisions or any
other aspect of the new law, please do not hesitate to call.
Very truly yours,
Kevin A. Cameron,
Partner, CPA
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