Question: What is the calculation for determining if my company may be eligible for the new health care tax credit?
Answer: The new healthcare reform law makes tax credits available to certain small employers. The tax credit is up to 35% of the employer contribution to health insurance premiums, but to be eligible there are several hurdles, including:
- The company must have fewer than 25 employees (not including the owner and owner’s family members) and the number is calculated as follows:
- Employer counts all hours worked by all full-time and part-time employees (not to exceed 2,080 for any worker, and not including seasonal employees working fewer than 120 days per year).
- The total hours worked is then divided by 2,080.
- The resulting number (rounded down to the nearest whole number) from the above calculation is the number of employees that should be used in determining eligibility.
- The average wage must be less than $50,000 (not including the business owner and family members).
- The business must contribute a uniform percentage of at least 50 percent of the premium cost for the employee only.
To receive the full tax credit, the company must have fewer than 10 employees and the average wage must be under $25,000. Companies with 11 – 25 employees and wages under $50,000 are eligible for partial credits.
Following are a couple of examples on the calculation of the number of employees:
Example 1:
In the 2010 tax year, DEF Fiberboard Company has:
- 7 full-time employees each working 2,080 hours per year – for a total of 14,560 hours
- 3 part-time employees each working a total of 1,040 hours per year – for a total of 3,120 hours
- 1 part-time employee working a total of 780 hours per year
Therefore, 14,560 + 3,120 + 780 = 18,460. 18,460 divided by 2,080 = 9.0049 FTE rounded down to 9 FTE. In this example, DEF Fiberboard Company would be eligible for the full tax credit (assuming they meet the other criteria).
Example 2:
In the 2010 tax year, GHI Industries has:
- 7 full-time employees each working 2,080 hours per year – for a total of 14,560 hours
- 4 part-time employees each working a total of 1,500 hours – for a total 6,000 hours
- 4 part-time employees each working a total of 1,040 hours – for a total of 4,160 hours
Therefore, 14,560 + 6,000 + 4,160 = 24,720 hours divided by 2,080 = 11.88 FTE, rounded down to 11 FTE. In this example, GHI would be eligible for a partial credit (assuming they meet the other criteria).
The tax credit is nonrefundable for for-profit companies and is taken on your annual corporate tax return. It may be carried back one year or carried forward 20 years. For tax exempt organizations, the tax credit reduces payroll taxes (Employee federal withholding, Employee Medicare tax, Employer Medicare tax).
The tax credit is available for tax year 2010 at a maximum rate of 35% and increases in 2014 to 50% (35% for tax exempts) if coverage is purchased through the Exchange and lasts for two years. The credit is also capped by the average premium paid in the small group market based in the state.
Now, what about the wages calculation? Again using DEF Fiberboard Company, their 9 FTEs have average annual wages of $24,000 (excluding owners and family members). DEF paid $81,000 in health care premiums. They meet the criteria for number of employees and average wages and, for this example, we will assume they pay 50% of the premium as well. DEF’s tax credit would be:
- 35% X $81,000 = $28,350.
Now, let’s use GHI Industries and their 11 FTEs. Assume an average annual wage of $30,000 and health care premiums of $99,000. GHI will be eligible for a partial credit. Here is the calculation:
Initial Credit: 35% X $99,000 = $34,650
Reductions:
- Excess FTE: $34,650 X 1/15* = $2,310
- Excess Wages: $34,650 X $5,000/$25,000* = $6,930
- Total credit reduction: $2,310 + $6,390 = $9,240
- Total 2010 tax credit: $34,560 – $9,240 = $25,320
Before you ask… GHI has one too many FTEs to receive the full credit and their average wage is $5,000 – too high to receive the full tax credit. The 15 and $25,000 are the fixed numbers that allow for the sliding scale reductions.
Wow… and if you think this is tough to get your head around, what until we try to explain the rules around “grandfathered plans” – the regulations only take up about 100 pages…
For more information on how the Patient Protection and Affordable Care Act impacts your company, visit: www.sbam.org/healthcarereform . Here you will find a timeline on reform, several articles and many answers to the most frequently asked questions about reform.