Does the Employer Qualify for the Credit?
For tax years beginning in 2010 through 2013, eligible small employers (including small
tax-exempt employers) that purchase health insurance coverage for their employees may be eligible for a tax credit to help offset the cost of the insurance coverage. This is one of the few provisions in the Patient Protection and Affordable Care Act (Health Care Act) that is effective in 2010.
Only eligible small employers qualify for the credit. An eligible small employer is an employer that meets all the following requirements:
1. It employs no more than 25 Full-time Equivalent (FTE) employees during its tax year. FTE employees are determined by dividing the total hours worked by all employees during the year by 2,080 (rounded down to the nearest whole number). However, the maximum hours counted for any one employee is 2,080. Also, the hours worked by seasonal workers aren’t counted unless they work for the employer on more than 120 days during the tax year.
2. It pays annual FTE wages that average no more than $50,000. This is determined by dividing the total wages the employer pays by the number of its FTE employees and then rounding that number down to the nearest $1,000. For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).Wages paid to seasonal workers are excluded if the worker’s hours are excluded in determining the number of FTE employees for item 1.
3. The employer has a qualified health insurance plan (or arrangement) that requires it to pay at least 50% of the premiums (on a uniform basis) on behalf of all of its employees who enroll in the plan. Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, 5% owners of the employer and dependents of these self-employed individuals are not treated as employees. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals, nor is the individual taken into account in determining the number of FTE employees or average FTE wages.
Members of a controlled group or an affiliated service group are treated as a single employer for purposes of the credit. Thus, all employees of the group and all wages paid to employees by the group are counted in determining whether any member of the group is an eligible small employer.
Currently, I am advising my clients to not get too excited about this credit. There are many exclusions that will either reduce or eliminate the credit from many of their returns.
First, many of my clients are family run businesses. As such all family members, either by blood or marriage, will have their payroll excluded and thus reduce any potential credit.
Secondly, many of my employers have a staff that has an average annual payroll in excess of $50,000. These employers would be ineligible for the health care credit no matter the number of employees.
Third, many of my clients have a controlled group or are owners of affiliated companies thus requiring all employees to be included in the calculation and potentially making my client have more than 25 FTE and again eliminating the credit from these clients returns.
Finally, one must consider the time, effort and cost to calculate this credit. This is not an easy calculation with many rules and exceptions to the rules which must be observed.