|Small Business Health Care Tax Credit Update
We briefly went over this tax credit in a prior newsletter and posted an article on the specifics of the credit on our tax blog last year, and many of you have already observed how this credit works out on your tax return. Some of you received sizable credits and others received minimal amounts or nothing at all, but regardless of the amount of the credit, you likely realized the complexity of the calculation by all the new questions we asked and the additional information we requested. This should come as no surprise as the tax code seems to get more complex each year; however, we would like to update you on some important points that help make the calculation less complex for your business and help maximize your tax credit.
Reminder– not all employers qualify for this credit. In order to qualify, you must have fewer than 25 full-time equivalent employees (FTEs) – which is explained below – with average wages less than $50,000. For more information on these requirements, please refer to our prior newsletter.
Employees are not treated equally by the IRS for purposes of this credit. Therefore, it is important that you classify the employees into groups or departments in your software or with your payroll service provider as this will simplify tax credit calculation. You should split your employees into the following groups:
Days and Week-Worked Equivalency Methods
Owner(s) and their family members – this group includes any of the following: a self-employed sole proprietor; a 2% or more shareholder of a small business that is an S corporation; a partner in a partnership; a 5% or more owner of an eligible small business (including LLCs and corporations); and family members of any of these owners including a child, sibling, step-sibling, parent, step-parent, niece or nephew, aunt or uncle, in-laws, and any members of the household that qualify as a dependent.
Seasonal workers – employees that work 120 or fewer days during the tax year can qualify as seasonal workers for purposes of the credit and not be counted in the FTE calculation.
Eligible employees – all other employees that do not fall into the previous two groups should be classified together, as their hours and wages will be included in the tax credit calculation.
The credit is based on the number of full-time equivalent (FTE) employees you employ, which is calculated based on service hours worked by eligible employees. Each eligible employee’s hours are totaled (with a maximum of 2,080 hours per employee), and the total hours amount for all eligible employees is divided by 2,080 and rounded down to arrive at your number of FTEs. This is the standard method for calculating FTEs for the credit; however, there are two other methods that might simplify the calculation and increase your tax credit:
Employers need not use the same method for all employees, but may use different methods for different classifications of employees. An employee-by-employee basis could even be justified in many cases. Overall, these methods provide great flexibility and can often be the game changer in qualifying for the credit or clinching another FTE.
Days-worked equivalency – this method credits an employee with 8 hours of service for every day the employee earned at least one hour of pay.
Week-worked equivalency – this method credits an employee with 40 hours of service for every week the employee earned at least one hour of pay.
Health Insurance Premium Bookkeeping
Much of the tax credit calculation revolves around eligible employee hours and wages; however, once an employer is determined to be eligible for the credit, much more information is needed with regards to the employer’s health insurance premiums. Fortunately, a few simple procedural bookkeeping changes can greatly simplify this portion of the calculation:
Maintaining a Qualifying Arrangement
Classification of owner and family member insurance – when posting health and dental insurance premium payments, make sure premiums for owners and their family members are posted to a separate sub-account of employee benefits. These premiums are not included in the calculation, so it is important that they be separated.
Premiums for seasonal workers – even though it is important to classify seasonal worker wages and hours separately from eligible employees, their premiums are actually included in the calculation, so make sure their premiums are included with those for eligible employees.
Record coverage information in books – in order to finish the calculation, you have to report the type of coverage (single or family) and the number of employees with each coverage type. To simplify this final step, be sure to note this information in the “memo” field in your books when recording the premium payment. Typically, this information is provided on the bill from the insurance company, and it is much easier to record this each month than pull all the bills at year end.
The most important thing you can do to maximize your tax credit and avoid problems with the IRS is to make sure you maintain a “qualifying arrangement”. Translated into English, this means that the employer must pay premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage of not less than 50 percent of the premium cost in order to qualify for the credit.
For example, in a business that offers one health insurance plan, the amount paid by the employer must be at least 50 percent of the total single-only premium cost. A lesser percentage may be paid for employees with family coverage as long as they receive at least the same amount as the employees with single-only coverage. Each situation is different and should be evaluated carefully, so we strongly suggest some planning at this point in the year so that there are no surprises when we prepare your 2011 tax return. There is still time to do some maneuvering so that your employer-paid portion reaches the 50% requirement when calculated over the entire 2011 tax year.
The IRS provided some relief on the uniformity requirements for 2010 (see Notice 2010-44); however, starting in 2011, it is crucial that a uniform percentage be paid for each enrolled employee. There are special rules when you offer multiple health plans (see Notice 2010-82 for more information), and it can get rather complex, so please call us if you would like us to review your specific arrangement to make sure it qualifies for the credit.
It is highly recommended that this arrangement be in writing and reviewed on a regular basis to make sure it is being followed. The arrangement should specify that the company is providing the employees with health insurance coverage and describe the coverage, which could be an employer group policy or employer reimbursement of employee individual policies. It should also detail the employer-paid portion of the total premiums and the employee responsibilities. If you would like any assistance in writing or updating your health insurance coverage arrangement, please contact our office soon so that any required changes can be made in time to qualify for the credit for tax year 2011.
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