By: Frederick U. Longwood, CPA
Tax Manager
The Patient Protection and Affordable Care Act (the Act) which was signed into law on March 23, 2010, contains several provisions to encourage employers to provide health care coverage to their employees. The Act does not require employers to provide health insurance coverage to employees, but starting in 2014, employers may be penalized for failing to do so. These penalties, which will be enforced by the Internal Revenue Service, will be imposed on employers with at least 50 full-time employees (those who work 30 hours or more per week).
The legislation offers a tax credit to eligible small employers to assist them in purchasing health insurance for their employees. For employers that are not tax-exempt organizations, the credit is equal to 35% of the lesser of:
(a) the employer's nonelective contributions for insurance premiums paid on behalf of their employees for health insurance premiums; or
(b) the average premium for the small group market offered in that employer's state.
Beginning in 2014, the credit increases to 50%. The credit will be claimed as a general business credit under Internal Revenue Code Section 38; and as such, any unused credit amount may be carried back one year and forward 20 years. The one-year carry back is not available for the tax year 2010 because the credit may not be carried back to 2009, which was a tax year before the effective date of the credit. For tax-exempt organizations, the maximum credit is 25% through 2013, and 35% beginning in 2014.
Tax-exempt employers not eligible to claim the general business credit under Section 38 will claim the credit against their payroll tax liabilities. The credit will be a refundable tax credit limited to the amount of the tax-exempt employer's payroll taxes (income tax and Medicare tax withheld from employees' wages and the employer share of Medicare tax on employees' wages) during the calendar year in which the tax year begins.
Both taxable and tax-exempt employers will be considered qualified eligible small employers if they have fewer than 25 full-time employees whose annual wages for the year are less than $50,000 and are covered by a qualifying health insurance arrangement. A health insurance arrangement will be considered qualified as long as the eligible small employer is required to make a nonelective contribution (that is, an employer contribution other than an employer contribution pursuant to a salary reduction arrangement) for each employee who enrolls in a qualified health plan offered to employees through an exchange that is equal to a uniform percentage, but not less than 50 percent, of the premium cost of the health plan. The premiums paid under the qualifying arrangement must provide health insurance coverage that meets the requirements of Section 45R.
The full amount of the credit is available to all employers with 10 or fewer employees with average annual salaries of $25,000. The credit will be phased out to the above mentioned 35% and 25% limits and the average wage threshold will be indexed for inflation beginning in 2014.
The Treasury is slated to issue regulations governing the determination of eligibility for the credit, calculation of the amount of the credit, and the mechanics for how the credits are to be claimed. Comments on the issues to be addressed in the regulations are due by August 30, 2010.
The value of the health insurance coverage provided by all employers, both eligible small employers and all others, will be required to be reported on each employee's Form W-2 for tax years beginning after December 31, 2010.
Frederick Longwood is a tax manager in Tate & Tryon's Tax department and can be reached at flongwood@tatetryon.com.
