by: Larry Gearhardt, OSU Extension Tax Specialist
In March 2010, President Obama signed into law new health care reform. One part of the legislation is known as the Patient Protection and Affordable Care Act. Many of the provisions contained in the law become effective in 2013 and the law will be active beginning in 2014.
While the primary purpose of this reform is to mandate that all U.S. residents obtain health insurance coverage, the law creates a host of tax credits and penalties on taxpayers and employers for failure to do so. In addition, there are several new rules that were created to raise the necessary funds to do so.
LARGE EMPLOYERS DISTINGUISHED
A previous article appearing in the Ohio Ag Manager on June 26, 2013, explained how, beginning in 2014, “applicable large employers” must provide affordable health coverage with minimum essential coverage to employees to avoid a tax penalty. NOTE: On July 3, 2013, the Obama administration announced that the employer responsibility and insurance reporting requirements under the Affordable Care Act have been postponed until January 1, 2015, to give businesses more time to comply with the health care reform law.
An “applicable large employer” is an employer that employed 50 or more full-time and full-time equivalent employees in the preceding year. An employer that did not employ 50 or more full-time and full-time equivalent employees in the preceding tax year is not subject to a penalty for failing to provide affordable health coverage to its employees.
SMALL EMPLOYER HEALTH INSURANCE TAX CREDIT
Even though an employer may not be an “applicable large employer” and thereby subject to a penalty for failing to provide health coverage, the law encourages small employers to provide health coverage through the Small Employer Health Insurance Tax Credit. This law is currently in effect and is not affected by the postponement of the implementation of the law for large employers.
For tax years beginning in 2010, eligible small employers could receive a tax credit for providing health coverage to its employees. An eligible small employer is defined as an employer with:
Less than 25 full-time equivalent employees for the tax year, AND
Average annual wages of less than $50,000 per full-time equivalent employee
HOW MUCH IS THE CREDIT?
In 2010 through 2013, the full credit is 35% of the employer’s contribution. For 2014, the tax credit amount will increase to 50%. However, even though an employer may qualify as a small employer, he may not be able to take the full credit. The amount of the credit may be adjusted depending on the number of employees or the amount of average annual wages. Furthermore, the credit is reduced if the employer premiums paid are more than the employer premiums that would have been paid if the employees are enrolled in a small group market in the state where the employee works. The average premium paid in Ohio in 2012 for single, employee-only coverage in a small group market was $4,987.
The full credit amount is available for small employers who have 10 or fewer full-time equivalent employees and the average annual wages are $25,000 or less. If there are more than 10 full-time equivalent employees, or average annual wages exceed $25,000, an initial credit is computed and then a reduction is calculated.
There are two possible reductions to the credit. First, if the number of full-time equivalent employees exceeds 10, the reduction is determined by multiplying the initial credit by a fraction. The numerator of the fraction is the number of full-time equivalent employees exceeding 10 and the denominator is 15. The result is subtracted from the initial credit amount.
EXAMPLE: Fred Farmer owns a business with 10 full-time equivalent employees during 2013. Total wages were $230,000, or an average of $23,000 per FTE employee. Fred paid $48,000 in insurance premiums for the 10 employees. The credit is 35% of $48,000, or $16,800, which is the full credit allowed for 2013. If Fred Farmer has 13 FTE employees during 2013, the credit is reduced by 20% (3/15 = 20%), so the credit would be $13,440.
The second possible reduction to the full credit amount is if the average annual wages exceeds $25,000 per employee. If the average annual wage per employee exceeds $25,000, the full credit amount is reduced by a fraction where the numerator of the fraction is the amount of average annual wage exceeds $25,000 and the denominator is $25,000. The result is subtracted from the initial credit amount.
EXAMPLE: Assume the same facts as above with the exception that the average annual wage is $30,000. The full credit amount is $16,800. The full credit amount is reduced by 20% (5,000/25,000 = 20%) leaving a credit of $13,440.
NOTE: If Fred Farmer has more than 10 full-time equivalent employees AND the average annual wage per employee exceeds $25,000, there will be two reductions to calculate.
PREMIUM DEDUCTION REDUCED BY CREDIT AMOUNT
An employer can deduct the amount of health insurance premiums paid. The amount of the deduction for the health insurance premiums paid by an eligible small employer will be reduced by the allowable credit amount. In the previous example, if Fred farmer paid $48,000 in health insurance premiums and he receives the full credit of 16,800 for 2013, his deduction for the premiums paid is $31,200.
For the employer to receive the credit, he must pay a uniform percentage of not less than 50% of the premium amount for a single, employee-only premium for each employee enrolled in the health insurance coverage offered by the employer.
WHERE TO REPORT
The Small Employer Health Insurance Tax Credit is computed on IRS Form 8941. The credit is non-refundable, which means that if the full credit amount cannot be deducted in the current tax year, the excess can be carried back or forward.