By BRETT HERSH
MARTINSBURG -- On March 23, the Patient Protection and Affordability Act became law.
At that moment tens of thousands of businesses qualified for a substantial, retroactive tax credit – a credit that will reimburse up to 35 percent (50 percent in 2014) of the health insurance premiums they pay to cover their employees.
The credit is called the "Small Employer Health Care Credit." Our analysis of the Small Employer Health Care Credit (governed by Section 45R of the Internal Revenue Code) reveals that the credit's structure will benefit many private practicing attorneys and small legal partnerships.
To qualify, your firm must meet three basic criteria: First, employ less than 25 "full-time equivalent" (FTE) employees, pay these FTEs an average salary/wage of less than $50,000 per year and, finally, pay at least 50 percent of each FTEs single-rate, annual health care premiums. If you believe your firm meets these basic requirements please read on as we sketch out the four steps necessary to determine whether your firm qualifies for the credit.
1). Determine which employees qualify. Only hours, wages, and insurance premiums of "qualifying employees" are considered when calculating the Small Employer Health Insurance Credit. Qualifying employees include all employees employed by the business with three exceptions. The first exception is owners, partners, or shareholders who have 2 percent ownership or greater. The second exception is family members and relatives of these owners. Those considered family members and relatives for purposes of Section 45R is quite extensive and includes virtually any blood or marriage relation as well as any household dependant. The third, and final, exception is seasonal workers who work less than 121 days during the tax year.
2. Employ fewer than 25 Full Time Equivalent Employees (FTE's): A "full time equivalent" employee is a measurement used to calculate the number of employees an employer would have if each employee worked 40 hours per week. To calculate the number of FTEs at your firm, take the total number of hours worked during the tax year by all qualifying employees. Include hours of paid holiday, vacation, and sick leave but do not count over 2,080 hours for any one employee. Once the hours have been totaled, divide that total by 2,080 - then, round the answer up to the next whole number to determine FTEs.
3. Pay each FTE an average of less than $50,000 per year: The average wage per FTE is calculated by taking the total wages paid to the FTEs during the tax year, dividing it by the total number of FTEs, then rounding down to the nearest $1,000.
4. Pay at least 50 percent of employees' single-rate health insurance: To qualify for the credit, employers must utilize a "qualifying arrangement" to pay at least 50 percent of their qualifying employees' health insurance premiums when calculated at the single (worker-only) rate. A qualifying arrangement exists if the employer pays a "uniform percentage" (the same percentage of each employees' premiums) of at least 50 percent of each employee's single-rate health care premium. However, for 2010, this rule is relaxed. A "qualifying arrangement" will be considered to exist so long as the employer pays at least 50 percent, but not necessarily the same percentage, of premiums for each employee enrolled in employer-offered coverage.
Although total premiums are utilized when determining whether an employer has paid a qualifying percentage premiums, only premiums actually paid by the employer are used to calculate the credit. For example, if the employer pays 60 percent of an employees' coverage, only the premium actually paid by the employer (60 percent) is utilized to calculate the credit.
The amount of premium that can be used to calculate the credit is capped by the average premium paid for "small group" market coverage in the employer's state (or geographic area) where the insurance is offered. This small group premium limit is determined by the Department of Health and Human Services and published via Revenue Ruling 2010-13 (this ruling can be downloaded at HBSbusiness.com). When calculating the amount of "qualifying premium" employers must use the lesser of the single-rate premium actually paid for the employee (calculated at the employee-only rate) or the amount listed on Revenue Ruling 2010-13.
Through 2013, the maximum credit is 35 percent of qualifying premiums for small businesses and 25 percent for nonprofits. The credit, however, is skewed so that only employers who employee 10 FTEs or less who earn an average of $25,000 or less qualify for the maximum credit. The credit begins to phase out when the number of FTEs exceeds 10 or average wages exceed $25,000. When the number of FTEs surpasses 25 and/or average wage becomes greater than $50,000 your firm's credit will be reduced to zero.
This article offers an outline to determine whether your firm will qualify for the Small Employer Health Insurance Credit. It does not address many details that may impact your credit, planning strategies that may help to maximize the credit, or changes to the credit scheduled to occur in upcoming years.
Editor's Note: Hersh is the owner HBS Tax and HBS Class Action Administration. He can be reached at (304) 267-2594 or at HBSbusiness.com.