If you currently cover your employees with health coverage, you will find a big smile planted on your face when you read how the new health care law might put money in your pockets, starting right now. And you may not have to make a single change in business practice to get your money.
Example. Jane Smith operates a 10-employee business, and she currently covers her employees with health insurance at a cost to her business of $60,000.
Before the new law, Ms. Smith deducted the cost of the insurance and received a tax benefit of $24,000 in her 40 percent tax bracket ($60,000 times 40 percent).
This year, because of the new law, Ms. Smith makes not a single change in her business operations, but because of the new law, she receives a tax credit equal to 35 percent of the $60,000 she paid for health insurance and then she deducts the remainder, for a current-year tax benefit of $36,600. She’s smiling. This new law gives her a tax gift of $12,600.
Ms. Smith receives this gift each year for six taxable years (four years under phase 1 and two years under phase 2). In six years, Ms. Smith will have more than $75,600 in extra cash (note—this calculation includes the incremental increase in the tax credit from 35 to 50 percent in 2014 and 2015).
What will the small-business provisions of the new health care law give you?
The Rules You Want to Know
You qualify for the full 35 percent current-year tax credit on the dollar amount you pay for your employees’ health insurance when you
1. employ 10 or fewer full-time equivalent employees (phaseouts start with 11 equivalent employees),
2. pay each of those full-time equivalent employees an annual full-time equivalent wage of less than $25,000 (phaseouts start at $26,000),2 and
3. pay premiums of no less than 50 percent of the average employee-only small-group coverage premiums, as determined by the U.S. Department of Health and Human Services (these will be posted by the IRS on its Web site by the end of April 2010).
You calculate your full-time equivalent employees by dividing the total hours worked by all employees during the employer’s tax year by 2,080.4 For any one worker, you may not count more than 2,080 hours.
Example. You have 17 employees total, including those who work part-time. This group works 18,000 hours during the year. You have eight full-time equivalent employees (18,000 hours divided by 2,080 equals 8.65, which is then, by law,6 rounded down to the nearest whole number, which makes eight employees your number).
Your payroll is $192,000 for the year. Divide that by eight and you get an annual full-time
equivalent wage of $24,000.
The next test: Did you pay at least 50 percent of the health insurance premium for single
(employee-only) coverage? You can pay more, and you can even pay for family coverage, but you may not pay less than 50 percent of the employee-only coverage.
Phaseout of Credits
The new law contains two provisions that injure or kill your credit:
1. If you have more than 10 full-time equivalent employees, you reduce your credit by 1/15th for each excess employee. (Here, the law kills your credit in total when you have 25 or more full-time equivalent employees.)
2. If the average full-time equivalent wage exceeds $25,000, you reduce your credit by 1/25th for each $1,000 in excess of $25,000. (Here, the law kills your credit in total when you pay an average full-time equivalent wage of $50,000.)
The combination of the two provisions can kill your credit before you reach either the 25-employee limit or the $50,000 wage limit.
Phaseout Example
Example. For 2010, you have 12 full-time equivalent employees with average annual wages of $30,000. You pay $96,000 in health care premiums that cover at least 50 percent of the employee-only cost, as determined by the average premium for the small-group market in your state.
Your credit is calculated as follows:
Description Calculation Amount
Description |
Calculation |
Amount |
| Credit before deductions |
35% x $96,000 |
$33,600 |
| Two employees in excess of 10 |
$33,600 x 2/15 |
-4,480 |
| $5,000 in wages in excess of $25,000 |
$33,600 x $5,000/$25,000 |
-6,720 |
| Health care tax credit |
$22,400 |
Summary
To find your big smile in this new health care law, consider the following two phaseouts.
Do you have 10 or fewer full-time equivalent employees? (If “yes,” smile.)
Is the annual full-time equivalent wage less than $25,000? (If “yes,” another smile!)
Planning might assist you in this regard. Perhaps you could hire a lower-paid employee or two to help the wage averages.
If you already provide health insurance for your employees, you have to simply thank lawmakers for their generosity, because you are now receiving an extra award for what you already do.
Finally, getting the tax credit for six years is a great bonus for those with plans in place already and certainly an incentive for those small businesses thinking about putting a health insurance plan in place.
You have to like the small-business health care tax credit and the absence of a penalty for small businesses that do not participate.