In the New Health Reform Law there is some potential good news for employers who pay for a portion of their employees health insurance. Well sort of........here is how it works (it's a bit confusing...and long):Small Business Health Care Tax Credits (Retroactive effective January 1, 2010 )
Eligible employers may be offered a credit of up to 35% of what they paid towards the cost of employee’s health care!
Who is Eligible ?
Employers with less that 25 Full Time Equivalent (FTE ) employees and average wages below $50,000 and contribute at least 50% toward the cost of the employees individual plan.
Highest credits give to employers with 10 or less FTE employees and average wages below $25,000.
As the number of employees exceed 10 and the wages exceed $25,000, the credit decreases until at 25 employees and $50,000 average wages, the credit is $0
How do I calculate my number of FTE employees?
Divide the total number of hours worked by all employees (excluding owners and seasonal employees) by 2080 and round to the next lowest whole number. If employees worked more than 2080 hours then use 2080.
Seasonal employees are not counted in the FTE calculation if they worked less than 120 days in the tax year. However, premiums paid on their behalf may be counted towards the credit.
Sole Proprietors, Partners in a partnership, shareholders owning more that 2% in a S Corporation and any owner of more than 5% of other business…… and all family members are not considered employees for purposes of the tax credit. Therefore, premiums paid on their behalf are also not counted towards the credit as well.
For Example, Jones Company has 5 full-time employees and 3 part-time employees. The part-time employees work 20 hours each per week. Therefore:
(5 X 2080 = 10,400)
(3 X 1040 = 3,012)
13,412 divided by 2080 =6.45 or 6 (Rounded to the next lowest whole number)
How do I determine average annual wages?
You will divide the total wages paid for FTE employees……not including those already listed as ineligible) by the total number of FTE .
$200,000 (total wages) / 10 (FTE Employees) = $20,000 (Average Annual Wage)
How do I calculate my credit?
If you have 10 or less FTE employees and an average annual wage under $25,000 then you are eligible for a 35% credit on what you have paid towards your employees coverage.
What happens if I have 10 or more FTE ’s and/or the average annual wage is over $25,000?
This is where it gets a bit tricky………………
For every employee over 10, the credit is reduced by 1/15th and 1/25th for every thousand dollars over $25,000.
For example:
ABC Company had 12 FTE Employees and an Average Wage of $30,000. The employer paid $28,800 ($200 X 12 Employees X 12 months).
Therefore the calculation looks something like this:
Calculate what the credit would have been without reductions…
(35% X $28,800) = $10,080
Then calculate the reduction of credit for number of employees over 10…..
($10,080 X 2/15) = $1,344 (Reduction of credit)
Then calculate the reduction of credit for each thousand dollars over the $25,000 threshold….
($10,080 X 5/25) = $2,016 (Reduction of Credit)
The credit then looks something like this:
$10,080 (Total Possible Credit) minus $1,344 (Reduction for number of employees over 10) minus $2,016 (Reduction for $5,000 over $25,000 threshold) = $6,720 Tax Credit
So how do you claim the tax credit?
Tax exempt organizations are eligible for a maximum 25% tax credit (as opposed to 35% for all others) and the credit is a refundable credit. In addition the tax credit may not exceed the total amount of income and medicare tax that the employer is required to withhold from employees wages and the employer share of medicare tax on employees wages for the year.
Amounts paid by the employer for dental and vision plans are also eligible but must meet these same requirements separately.
The Kicker
Most companies (except non-profits) must claim the credit as an offset of income tax liability. Therefore, in order to claim the credit, the company must make a profit. In other words, if the company is operating at a loss for the year, they are not allowed to take the credit. Doesn't this seem a bit backwards since the companies who would need this credit the most, aren't going to qualify?
