Posted: 11:15 am Tue, August 14, 2012
By Dan?Heilman
Tags: Andrew R. Biebl, CliftonLarsonAllen, Health Care, Internal Revenue Service, Lehrman Flom & Co., Small Business Health Care Tax Credit, Steve Warren, U.S. Patient Protection and Affordable Care Act
Image: Dreamstime
Buried deep in the health care reform law is a provision that seems set up to reward small businesses for providing health coverage for their employees. But does it really do that ? or much of anything?
The Internal Revenue Service has said that 15,400 small businesses are eligible for the Small Business Health Care Tax Credit, which is aimed at making health insurance more affordable for their employees.
Congress created the tax credit (available on IRS Form 8941) in 2010 as part of the overhaul of the health care system, and it was intended to be an incentive for small businesses to offer health insurance.
But companies and their accountants have found that the process for filing a claim is top-heavy, and the potential credits start to vanish if businesses don?t meet exacting standards.
?Nobody?s using it, and not because they don?t know about it,? said Andrew R. Biebl, a certified public accountant and partner with CliftonLarsonAllen in Minneapolis.
The U.S. Patient Protection and Affordable Care Act of 2010, whose constitutionality was upheld in June by the U.S. Supreme Court, provides a tax credit that?s 35 percent of a business?s health premium as long as the business meets a three-part standard:
- It must employ fewer than 25 full-time equivalents.
- Its average salary on the payroll must be less than $50,000 excluding salaries of the owner and his or her family.
- The business has to pay at least 50 percent of the single health insurance premiums.
?The instructions should be reviewed [by] anyone considering completing the form,? said Steve Warren, CPA, and director of taxation with Lehrman, Flom & Co. in St. Louis Park. ?The calculation can be relatively time-consuming and complex.?
Assuming your business meets the three criteria, you would look at all of your health premiums and compute 35 percent of that as your tax credit. If you?re a nonprofit, it?s 25 percent of the premiums. Also, the law doesn?t require a timely election, so business owners who have missed out to this point can file two amended returns to claim back credits.
According to the IRS, for tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective beginning next year, when the rate will increase to 50 percent and 35 percent, respectively.
Can you make it?
By the IRS formula, if a business pays $50,000 a year toward workers? health care premiums and it qualifies for a 15 percent credit, it would save $7,500. If a business saves $7,500 a year from tax year 2010 through 2013, that?s a total savings of $30,000. If, in 2014, the business qualifies for a slightly larger credit, say 20 percent, the savings can go from $7,500 a year to $12,000.
But reaching those benchmarks can be a problem, according to Biebl. Underneath the published eligibility rules, there?s a phase-out of the credit as employers go from 10 to 25 FTEs. To get the full credit, employers have to be under 10 FTEs, and to get the full credit on the wage test, they have to be under $25,000 in average payroll salary, not $50,000.
?Each of those is a proportional phase-out of the credit,? Biebl said. ?We represent clients in smaller towns all over the state, and you would think places like New Ulm and Owatonna would have tons of businesses with fewer than 25 bodies and less than $50,000 in average payroll [salary]. We worked with all those businesses ? got their hours, average payroll ? and we found that a lot of them were less than 10 bodies, but hardly any were less than $25,000 average payroll [salary].?
An Associated Press report in June showed how companies all over the country are finding it nearly impossible to fit within the guidelines necessary to receive the full credit, with several businesses indicating that it?s not worth the hassle.
?Even in the smallest towns, a business with less than $25,000 average payroll likely doesn?t equate to a business that?s probably providing health coverage,? Biebl said. ?The reality is you work all the numbers up and the credit evaporates because the phase-out dilutes it so badly.?
Warren agrees that the health care credit is simply too cumbersome for business owners whose time to deal with such matters is already stretched to the limit.
?One of the reasons you hire a CPA is to rely on that person to know about the tax benefits out there that are available for his or her clients,? said Warren. ?This and many other tax provisions are too arcane and difficult to deal with for the average taxpayers who rightfully are spending their time and efforts on what they do best.?
Warren adds that much of the information needed to calculate the credit is provided by payroll services in their standard client payroll reports to ease the information-gathering component for those who hire payroll services.
In May, the Government Accountability Office released a report, ?Small Employer Health Tax Credit: Factors Contributing to Low Use and Complexity,? that discusses how the credit is being underused. There are also current proposals to both increase the availability of the credit and to publicize it more effectively.
?There is a reasonable chance the former will happen and the latter is very likely to happen,? said Warren.
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