by Bryan McNutt
Summary:
The Affordable Care Act formulates quite a few changes to make insurance more affordable for smaller companies (up to 25 employees). Five billion dollars has been appropriated to the new tax credits, available to small companies, offering their employees insurance, until the end of 2013. On January 1, 2014 the bulk of this legislation comes in to effect. The bill is backed by 940 billion dollars, most of which takes effect in 2014, and will force states to set up Small Business Health Options Program (SHOP Exchanges). “These Exchanges would include web portals that provide standardized, easy-to-understand information that make comparing and purchasing health care coverage easier for small business employees, and reduce the administrative hassle that small businesses currently face in offering plans.”
- U.S. Department of Health & Human Services
Currently:
- “The U.S. health care system imposes a heavy “tax” on small businesses and their employees. Due to high broker fees, administrative costs, and adverse selection, small businesses pay up to 18 percent more per worker than large firms for the same health insurance policy.”
- High Broker Fees: Range from 2-8 percent of premiums.
- Administrative Costs: Fixed cost of setting up insurance policies is spread between less employees for smaller firms.
- Adverse Selection: Private insurers know that, among small firms, those with workers who have high health care needs are more likely to seek insurance.
- Executive Office of the President, Council of Economic Advisers
Effects of the Affordable Care Act:
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Qualifications
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Applicable After:
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Employee Count
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Average Annual Wages
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Prerequisites
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Applicable Tax Credit
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1/1/2010
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10 or fewer (full-time)
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$25,000 (maximum)
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Employers must pay at least half the cost of health insurance for covered employees
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35% of premiums
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25 or fewer (full-time)
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$50,000 (maximum)
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35% of premiums with phase-outs
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1/1/2014
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25 or fewer (full-time)
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$50,000 (maximum)
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Same
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50% premiums with phase-outs when AAW exceeds $25,000 or employees exceeds 10
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- A full-time employee is an employee who works, on average, at least 30 hours per week, when calculated on a monthly basis.
- Two part-time employees count as one full-time employee for tax credit calculation.
- Gradual phase-outs will apply to companies whose full-time employee’s number between 10 and 25, or companies whose average annual wage is between $25,000 and $50,000.
- A company will be eligible for more or less credit depending on amount of full time employees and average annual wage.
- A company that has 12 employees and pays their employees $26,000 on average will be eligible for more tax credit than a company with 18 employees and $45,000.
- Non-Profit Organizations are eligible for 25% tax credit until January 1, 2014, from which time they are eligible for 35% tax credit.
- If you’re an eligible small business you will claim the health insurance credit as part of your general business credit on the 2010 income-tax return.
Premium Cost Eligibility:
- Premium Cost Eligibility is implemented to avoid incentives to choose high-cost plans.
- “An employer’s eligible contribution is limited to the average cost of health insurance in that state.”
- U.S. Department of Health & Human Services
The average premium for the small group market in a state (or an area within the state) is determined by the Department of Health and Human Services (HHS). Revenue Ruling 2010-13 sets forth the average premium for the small group market in each state for the 2010 taxable year. For the 2010 taxable year, HHS may provide additional average premium rates for the small group market for areas within some states (sub-state rates). These additional sub-state rates will be published by the IRS and will not be lower than the applicable rate for each state that is set forth in RR-2010-13.
-IRS, The Affordable Care Act
After Implementation of the Affordable Care Act:
- Insurance premiums will stay significantly lower for all employees because the government will be regulating the impact of exchanges through the Government Accountability Office.
- “Reduces ‘job lock’ – the fear of switching jobs or starting a small business due to concerns over losing health coverage – by guaranteeing access to coverage for all Americans. This will encourage more people to launch their own small businesses, or join existing small employers.
- In Nevada there are 24,000 small businesses that are eligible to apply for the small business tax credit.
- U.S. Department of Health & Human Services
Directly Affecting Small Business Development Centers:
The part of this act that affects the Small Business Development Centers directly and not just the clients we work with is the awareness grants. To ensure small businesses are aware of the insurance options available to them, Small Business Development Centers and all Small Business Administration partners will be eligible for awareness grants. This includes Women’s Business Centers, SCORE, Minority Business Centers, Veteran Business Centers, and others.
- U.S. Department of Health & Human Services
Regarding PEO’s and how they will fair with the Passing of this Act (Congressional Record, March 24, 2010 {Senate} page S1989):
Mr. NELSON of Florida: There are millions of individuals throughout our country who are working for small businesses which are in PEO arrangements. The clear objective of this legislation is to create incentives for health care coverage and not to provide disincentives. I would like the chairman to clarify that, for purposes of the application of section 2716 of the Public Health Service Act (Prohibition on Discrimination in Favor of Highly Compensated Individuals) and for purposes of Internal Revenue Code sections 45R (Credit for Employee Health Insurance Expenses of Small Businesses) and 4980H (Shared Responsibility for Employers), to any health plans sponsored by a Professional Employer Organization, PEO, or a PEO client organization, the rules would be applied to each client organization separately and eligibility for the small business tax credits and employer shared responsibilities would also apply to each client organization separately, and not at the PEO level.
Mr. BAUCUS: If the individual providing services to the PEO client organization pursuant to the PEO arrangement continues to be an employee of the PEO client organization, the Senator from Florida is correct.
Examples:
Example 1: Main Street Mechanic – Auto Repair Shop with 10 Employees
- Employees: 10
- Wages: $250,000 or $25,000 per worker
- Employer Health Care Costs: $70,000
2010 Tax Credit: $24,500 (35% credit)
2014 Tax Credit: $35,000 (50% credit)
Example 2: Downtown Diner – Restaurant with 40 Part-Time Employees
- Employees: 40 half-time (equivalent of 20 full-time)
- Wages: $500,000 or $25,000 per full-time equivalent worker
- Employer Health Care Costs: $240,000
2010 Tax Credit: $28,000 (35% credit with phase-out)
2014 Tax Credit: $40,000 (50% credit with phase-out)
Example 3: 1st Street Family Services – Foster Care Non-Profit with 9 Employees
- Employees: 9
- Wages: $198,000 or $22,000 per worker
- Employer Health Care Costs: $72,000
2010 Tax Credit: $18,000 (25% credit)
2014 Tax Credit: $25,200 (35% credit)
Example 4: Acme Air Conditioning, LLC- Manufacturing Company with 12 Employees
- Employees: 12
- Wages: $420,000 or $35,000 per full-time equivalent worker
- Employer Health Care Costs: $90,000
2010 Tax Credit: $14,700 (35% credit with phase-out)
2014 Tax Credit: $21,000 (50% credit with phase-out)
- U.S. Department of Health & Human Services
Calculating Phase-Outs:
If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero). If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15. If 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. In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.
Example: For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit.
The credit is calculated as follows:
(1) Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600
(2) Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
(3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
(4) Total credit reduction: ($4,480 + $6,720) = $11,200
(5) Total 2010 tax credit: ($33,600 – $11,200) = $22,400.
- IRS, Small Business Health Care Tax Credit
Links:
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