1 Small Business Health Care Tax Credit: Presented by Maureen O Gara-Adford, CPA & David Fox, Senior Accountant
2 Today s Speakers Maureen O Gara-Adford, CPA Practicing CPA since 1989 Managing partner since 2006 Knowledge in specialized industries such as construction, software development, manufacturing distributorship, etc. Member of the AICPA, CALCPA, CSUN Alumni Association and the St. Paschal Baylon Finance Council. David Fox, Senior Accountant 21 years experience in public accounting; including business management and tax preparation Member of CALCPA, Board of Directors of the Woodland Hills- Tarzana Chamber of Commerce 2010 Member of the Year Woodland Hills Tarzana Chamber of Commerce
3 Agenda Overview of the Small Business Health Care Tax Credit Eligibility Requirements Full Time Equivalent Employees (FTE s) Calculation Average Wage Calculation Qualifying Arrangement Amount of Credit Phase-Outs Calculating the Credit Claiming/Receiving the credit Transition Relief for 2010 Tax Considerations and Miscellaneous Additional Information
4 What is the Small Business Health Care Tax Credit? On March 23, 2010, President Obama signed in to law the Patient Protection & Affordable Care Act, as part of the new health reform law. On March 30, 2010, President Obama signed in to law the Health Care & Education Reconciliation Act of 2010, which modified the Patient Protection & Affordable Care Act and included code section 45R which provides guidance for the Small Business Health Care Tax Credit. Provides a tax credit to certain small employers who provide health coverage to their employees There are two phases for the tax credit, with the first phase effective for tax years beginning with 2010 through 2013 An enhanced version of the credit will be effective beginning in 2014.
5 Did You Receive A Postcard From The IRS? Over 4 Million of these postcards were mailed to potentially eligible small business after 4/19/2010 to alert them to the new Small Business Health Care Tax Credit and encourage them to check their eligibility. Receipt of this postcard does not necessarily qualify the recipient to the credit nor does it disqualify those who did not receive this postcard.
6 Eligibility Requirements Both taxable (for profit) and tax-exempt firms may qualify Broad Eligibility - any type of business and entity type may qualify, including household employers and certain employers outside the U.S. The employer must have fewer than 25 full-time equivalent employees ( FTE s ) for the tax year with a gradual phase-out beginning with FTE s over 10. The average annual wages of its employees for the year must be less than $50,000 per FTE with a gradual phase-out beginning with average wages over $25,000 per FTE. The employer must pay the premiums under a Qualifying Arrangement which will be discussed in more detail later
7 Full-Time Equivalent Employees Employees excluded from FTE calculation: A Sole proprietor, a partner in a partnership, a shareholder owning more than 2% of an S Corporation and any owner of more than 5% of other businesses are excluded from all calculations. Family members of the business owner or shareholder who work for the business are excluded from all calculations. Seasonal workers that worked 120 days or less are also excluded from all calculations. Three calculation methods are available in determining the hours of service used in the FTE calculation: (1) Actual Hours Worked Method determine actual hours of service from records of hours worked and hours for which payment is made or due including hours for paid leave with no more than 160 hours required to be counted for any single continuous period of paid leave. (2) Days Worked Equivalency Method the employee is credited with 8 hours of service for each day for which the employee would be required to be credited with at least one hour of service under Method (1). (3) Weeks Worked Equivalency Method the employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service under Method (1) Use of different calculation methods - Employers do not have to use the same method for all employees, but may apply different methods for different classifications of employees, if the classifications are reasonable and consistently applied. For example, it is permissible for an employer to use Method 1 for all hourly employees, and Method 3 for all salaried employees. Employers may change the method for calculating employees hours of service for each taxable year.
8 Calculation of Full-Time Equivalent Employees After choosing the appropriate method, the number of FTE s is then Calculated by dividing (1) the total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080; rounded to the next lowest whole number (unless the result is less than one, in which case, the employer rounds up to one). The hours of service and wages of all non-excludable employees are taken into consideration in determining whether the employer is a qualified employer for purposes of the credit, regardless of whether or not they are enrolled in the employer s health insurance plan. Leased employees are counted in computing an employer s FTE s and average annual wages. However, premiums for health insurance coverage paid by a leasing organization for a leased employee are not taken into account by the service recipient in computing the service recipient s credit.
9 FTE Calculation Examples Basic Example Using the Actual Hours Worked Method: For the 2010 tax year, an employer s payroll records indicate that an employee worked 2,000 hours The employee was paid for an additional 80 hours of vacation, holiday and illness. Under the actual hours method, this employee must be credited with 2,080 hours of service (2,000 hours worked and 80 hours for which payment was made or due). Basic Example Using the Weeks- Worked Equivalency Method For the 2010 tax year, an employee worked 49 weeks This employee took 2 weeks of vacation with pay, and took 1 week of leave without pay Under the weeks-worked equivalency method, this employee must be credited with 2,040 hours of service (51 weeks multiplied by 40 hours per week)
10 FTE Calculation Examples (continued) Basic Example Using the Actual Basic Example Using the Actual Hours Worked Method: Hours Worked Method For the 2010 tax year, ABC Company has a total of 12 employees 8 full-time employees (paid 2,080 hours each) 4 part-time employees (paid 1,040 hours each) 8 x 2,080 = 16,640 4 x 1,040 = 4,160 16, ,160 = 20,800 20,800 / 2,080 = 10 FTEs For the 2010 tax year, an employer has 26 FTE s with average annual wages of $23,000 per FTE Only 20 of the employer s employees are enrolled in the employer s health insurance plan. Because the employer does not have fewer than 25 FTE s for the tax year, the employer is not a qualified employer for purposes of the credit.
11 FTE Calculation Examples (continued) Complex Example Using the Actual Hours Worked Method: For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours. Total hours not exceeding 2,080 per employee is 15,600 hours, calculated as the sum of: a) 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080) b) 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040) c) 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080) Based on 15,600 hours of service, the employer has 7 FTE s (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number).
12 Average Wage Calculation Wages for this purpose means wages as defined for FICA purposes without regard for the wage base limitation including wages paid for Leased Employees. Calculated by dividing (1) the total wages paid by the employer during the employer s tax year to employees (only employees that are considered to be FTE s) who perform services for the employer during the tax year by (2) the number of FTE s for the tax year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). Basic average wage calculation: For the 2010 tax year, an employer pays a total of $224,000 in wages to employees (FTE s only) who perform services for the employer during the tax year and has 10 FTE s. The employer s average annual wages are $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000).
13 Qualifying Arrangement A qualifying contribution arrangement is qualifying if it requires the employer to make non-elective contributions on behalf of every employee who enrolls in the employer plan. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50%) of the premium cost of the coverage. There is transition relief available for 2010 that I will discuss in more detail later in the presentation Different types of coverage are not aggregated for purposes of meeting the qualifying arrangement requirement, so if an employer offers a major medical insurance plan and a stand-alone vision plan and/or dental plan, for example, each type of coverage must separately satisfy the requirements for a qualifying arrangement.
14 Amount of Credit Maximum Amount The credit is worth up to 35% (25% for tax exempt employers) of a small business health insurance premium costs in On January 1, 2014, this rate increases to 50% (35% for tax-exempt employers). Only premiums paid by the employer under a qualifying arrangement are counted in calculating the credit. If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement, with employees paying the rest, the amount of premiums counted in calculating the credit is only the portion paid by the employer, such as with a section 125 cafeteria plan. State Average Premium Limitation - The credit amount is limited (capped) by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area in the State) in which the employer offers coverage were substituted for the actual premium. The average premium for the small group market in a State (or area within a State) is determined by the Secretary of Health and Human Services. The average premium for the small group market in each state for the 2010 taxable year can be found at the following link:
15 Amount of Credit (continued) Tax Offset An employer cannot claim the credit if it has no income tax or AMT liability (except in the case of a tax exempt employer), however, as a general business credit, an unused credit amount can be carried back (except for 2010), and any unused credit amount can be carried forward for up to 20 years Tax Offset for a tax exempt employer the credit is a refundable credit, so that even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the employer s income tax withholding and Medicare liability).
16 Phase-Outs If the number of FTE s exceeds 10, the amount of the credit is reduced by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTE s in excess of 10 and the denominator of which is 15. Example For the 2010 tax year, a qualified employer has 13 FTE s. The credit reduction for FTE s in excess of 10 is 20% (3/15). If the average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. Example For the 2010 tax year, a qualified employer pays average annual FTE wages of $35,000. The credit reduction is 40% ( 10/25). Both phase-outs are combined to reduce the credit. For example, if both examples above were for the same employer, the credit would be reduced by 60%.
17 Example - Basic Tax Credit Calculation An employer paid $64,000 in medical insurance premiums on behalf of their FTE s under a qualifying arrangement The company had 8 full-time employees (2,080 hours each) and 4 part-time employees (1,040 hours each) and no seasonal workers. 10 FTEs = 8 x 2, x 1,040 / 2,080 The average wages paid in 2010 to the FTE s was $25,000 The credit calculation is: $64,000 x 35% = $22,400 credit Because they are at 10 or less FTEs and at $25,000 or less in average wages, they are entitled to the full credit of $22,400
18 Example Comprehensive Tax Credit Calculation Employer has 18 employees; 12 are full-time and 6 are part-time. 1 of the 12 full-time employees is the owner and is credited with 2,080 hours. Of the remaining 11 full-time employees; 8 of them were exempt and were paid a combined 16,640 hours (2,080 each). The remaining 3 full-time employees were non-exempt and were paid 6,840 hours which included 600 hours of OT. The 6 part time employees were paid a total of 6,240 hours and worked more than 120 days each during the year. Total Hours Paid = 31,800 (2, , , ,240). The number of hours to be used in calculation of FTEs = 31,800 2, = 29,120 Number of FTEs = 29,120 / 2,080 = 14 FTEs
19 Example Comprehensive Tax Credit Calculation (continued) Employer s total payroll of $472,385 was comprised of the following: The 1 owner was paid a total of $80,000 The 8 exempt staff were paid $256,000 The 3 non-exempt staff were paid $82,385 which included $10,385 in overtime The 6 part time staff were paid $54,000 The eligible wages for credit purposes is equal to: $472,385 - $80,000 - $10,385 = $382,000 Therefore, average wages for purposes of the credit is equal to: $382,000/14 FTE s = $27,286 or $27,000 (rounded down)
20 Example Comprehensive Tax Credit Calculation (continued) The employer pays 75% of the single and family premiums for employees working 30 hours or more per week (12 employees). The premiums do not exceed the average premium for the small group market in the employer s state. This represents a total of $98,100 in employer paid premium which includes $4,500 paid on behalf of the 1 owner. For purposes of the credit, the amount of premium expense eligible for the credit is: $98,100 - $4,500 = $93,600 The potential credit is $93,600 x 35% = $32,760 (before potential phaseout)
21 Example Comprehensive Tax Credit Calculation (continued) The employer qualifies for a potential credit of $32,760. The credit is reduced based on the excess number of FTE s over 10 divided by 15: Excess FTE s: = 4 Credit reduction percent: 4/15=26.7% Reduction in credit: 32,760 x 26.7% = $8,736 The credit is also reduced based on the excess average wages exceeding $25,000 divided by $25,000: Excess average wages: $27,000 - $25,000 = $2,000 Credit reduction percent: $2,000/$25,000 = 8% Reduction in credit: $32,760 x 8% = $2,621
22 Example Comprehensive Tax Credit Calculation (continued) The employer qualifies for a potential credit of $32,760. The credit is reduced based on the excess number of FTE s over 10 (4 divided by 15) or 26.7% = $8,736 The credit is further reduced based on the excess wages exceeding $25,000 ($2,000 divided by $25,000) or 8% = $2,620 The final credit calculation can be summarized as: $32,760 - $8,736 - $2,620 = $21,404
23 How to Claim/Receive the Credit An employer (other than a tax-exempt employer) claims the credit on the employer s annual income tax return, with an attached Form 8941 showing the calculation of the credit. You then include the amount of the credit as part of the general business credit (Form 3800) on the income tax return A tax exempt employer described in section 501( c ) that is exempt from tax under section 501 ( a ) claims the refundable credit by filing Form 990- T with an attached Form 8941 showing the calculation of the claimed credit.
24 Form 8941
25 Transition Relief for 2010 There is transition relief available for tax years beginning in 2010 to make it easier for small employers to meet the requirements for a qualifying arrangement. For an employer that pays at least 50% of the premium for each employee enrolled in coverage offered to employees by the employer is deemed to satisfy the qualifying arrangement requirement even though the employer does not pay a uniform percentage of the premium for each such employee. Certain employers who do not satisfy the 2010 transition rule described above (because they contribute less than 50% of the employee-only premium for some enrolled employees) may still qualify for the credit for the tax year beginning in 2010 under other rules for qualifying arrangements. Employers who may be able to take advantage of these rules include, for example, employers who offer more than one type of health insurance coverage or whose insurance provider does not charge the same premium for all employees enrolled in single (employee only) coverage. Details are in IRS Notice and
26 Tax Considerations and Miscellaneous In computing the credit for a tax year beginning in 2010, employers may count all premiums for that tax year including those paid prior to law being enacted in March The credit can be used to offset an employer s AMT liability for the year, subject to certain limitations based on the amount of an employer s regular tax liability, AMT liability and other allowable credits. In determining the employer s allowable deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit. If the employer is a fiscal year taxpayer with a tax year beginning, for example on July 1, 2010, the credit first applies for the taxable year beginning on July 1, 2010 and ending on June 30, If an employer has employees in multiple states, the employer applies the average state premium for the small group market separately for each employee using the average premium for the state in which the employee works. For tax years beginning in 2010 through 2013, a qualified employer located outside the U.S. (including an employer located in a U.S. territory), which has income effectively connected with the conduct of a trade or business in the U.S., may claim the small business health care tax credit only if it pays premiums for an employee s health insurance coverage that is issued and regulated by one of the 50 states or the District of Columbia.
27 Tax Considerations and Miscellaneous (continued) For purposes of determining whether the employer has satisfied the qualifying arrangement requirement to pay an amount equal to a uniform percentage (not less than 50%) of the premium cost, the premium payments made by the employer are not reduced by any state credits or subsidies. If a state makes payments directly to an insurance company to pay a portion of the premium for coverage of an employee under employer-provided health insurance (state direct payments), the state is treated as making these payments on behalf of the employer for purposes of determining whether the employer has satisfied the qualifying arrangement requirement to pay an amount equal to a uniform percentage of the premium cost of coverage. Also, these premium payments by the state are treated as an employer contribution for purposes of calculating the federal health care tax credit Although state tax credits and payments made directly to an employer do not reduce an employer s otherwise applicable federal health care tax credit, and although state direct payments are generally treated as paid on behalf of the employer, the federal health care tax credit cannot exceed the amount of the employer s net premium payments. In the case of a state tax credit for an employer or a state subsidy paid directly to an employer, the employer s net premium payments are calculated by subtracting the state tax credit or subsidy from the employer s actual premium payments. In the case of a state direct payment, the employer s net premium are the employer s actual premium payments. Farmer cooperatives a section 521 farmers cooperatives that are subject to tax under section 1381 are eligible to claim the small business health care tax credit as a taxable employer, if it otherwise meets the definition of an eligible small employer. Church welfare benefit plans an arrangement under which an otherwise qualifying small church employer pays premiums for employees who receive medical care coverage under a church welfare benefit plan may be a qualifying arrangement for purposes of the small business health care tax credit.
28 Additional Information: Link to today s full presentation: Link to IRS website containing FAQ:
29 Memberships and Awards