HRB 27 - Additional Guidelines to the Small Business Tax Credit
Released December 22, 2010I Download as a PDF December 22, 2010 --
As part of the Patient Protection and Affordable Care Act (PPACA), a tax credit is made available to certain small employers who offer qualifying health coverage to their employees (see CBIZ Health Reform Bulletin, Small Business Health Care Tax Credit
). Recently, the IRS released some additional welcome guidance on how this credit is to be implemented, specifically:
- New Form 8941 and Instructions for calculating the Credit for Small Employer Health Insurance Premiums;
- Frequently asked Questions; and
- IRS Notice 2010-82.
Following is a summary of some points of particular interest from this guidance:
Employers entitled to the credit. Small businesses and tax-exempt employers that provide health care coverage to their employees under a qualified health care arrangement are entitled to a credit for taxable years beginning after December 31, 2009. To be eligible, the business must:
- Employ 25 or fewer full-time equivalent employees ("FTEs") for the tax year;
- Pay average annual wages of less than $50,000 per employee; and
- Maintain a qualifying arrangement. In a "qualifying arrangement" the employer pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (minimum 50%) of the premium cost of the coverage.
A §521 farmers cooperative is eligible to claim the credit as a taxable employer, if it otherwise meets the definition of an eligible small employer.
A small eligible employer need not be engaged in a trade or business, i.e., a household employer may be eligible for the credit.
Determining Full-time Equivalent Employees
Employee-spouses of sole proprietors, partners with 5% interest in a partnership, 2% shareholders in an S corporation, and 5% owners of the business, are excluded from being taken into account as employees for purposes of determining an employer’s FTE, average wages and premiums paid.
Health premiums paid for a leased employee are not taken into account by the service recipient in computing the service recipient’s credit.
Unless specifically excluded, all employees during the year for which the credit is being claimed are taken into account in computing an employer’s FTEs and annual average wages, including, for example:
- Former employees who terminated employment during the year for which the credit is being claimed
- Employees covered under a collective bargaining agreement, and
- Employees who do not enroll in their employer’s health insurance plan (whether or not they are covered under another health insurance plan).
All wages, including overtime pay (wages for hours >$ 2,080), are taken into account in computing the employer’s average annual wages.
An employee’s hours of service may be calculated in three ways:
- Counting actual hours worked;
- Using a days-worked equivalency; or
- Using a weeks-worked equivalency.
Employers need not use the same method for all employees, and may apply different methods for different classifications of employees, if classifications are reasonable and consistently applied. For example, an employer may use the actual hours worked method for all hourly employees, and the weeks-worked equivalency method for all salaried employees. Employers may also change methods for each taxable year.
Plans for which the credit is available. The credit is only available for insured plans; it is not available for self-funded plans. Therefore, the credit is not available for employer contributions to flexible medical spending accounts, health reimbursement arrangements, health savings accounts, or other similar account-based plans.
Multi-Employer Plans. Contributions to a multiemployer plan used to pay health insurance premiums for covered employees qualify for the credit even if insurance premiums are paid by the plan and not directly to the employee. If 100% of the cost of coverage is paid from non-elective employer contributions, and not by employees, each employer in the multiemployer plan is considered to be contributing a uniform percentage of 100% of the premium of each covered employee. If the multiemployer plan provides welfare-type benefits (i.e. life insurance or short- or long-term disability benefits) in addition to health insurance, only contributions used to purchase health insurance are permitted to be taken into account in determining the credit and employer must allocate contributions among the benefits provided.
Church Plans. Church-sponsored welfare benefit plans subject to state insurance law regulation satisfy health insurance coverage requirements. Small church employers paying health care premiums for its employees may qualify for the credit.
One of the criteria to receive the credit requires the employer to contribute a uniform percentage of the premium. Notice 2010-82 provides several illustrations about how this uniformity requirement can be satisfied.
Generally, this guidance provides uniformity calculations for composite plans, and list bill plans; and provides guidance on single tier and multi-tier plans. To understand these calculations, it is important to understand what these terms mean.
- A composite plan means a plan in which a uniform premium is assessed for any tier of coverage.
- A list bill plan is one in which premium is determined based on individual characteristics, and may differ for each plan participant.
- Tier coverage is a unit that differs only by the number of individuals in a family unit. For example, employee, employee plus one, or employee plus family.
According to this guidance, a composite plan with a single tier of coverage will meet the uniformity requirement if the employer contributes at least 50% of the premium for the single tier.
In a composite multi-tier plan, the uniformity requirement can be satisfied in one of two ways; either:
- The employer contributes a uniform percent of each tier of coverage, or
- The employer contributes at least 50% of the single tier of coverage.
If the plan is list billed, the uniformity requirement can be satisfied either by:
- The employer contributing at least 50% of each participant’s premium, thus resulting in different employer contributions for each individual; or,
- The employer contributing at least 50% of the single tier of coverage of the employer calculated composite rate. The employer’s calculated composite rate is determined by adding the premium for each eligible individual, without regard to whether the individual actually participates in the plan, divided by the number of eligible individuals.
If the employer offers multiple list billed plans, the uniformity requirement can be satisfied for each plan separately. The premium is either:
- Fifty percent of the single premium list bill, or at least 50% of the employer calculated composite premium; or
- Fifty percent of the employer calculated composite premium for each tier of coverage.
Multiple plan options. If the employer offers multiple plan options, each plan option must satisfy the uniformity requirement, independent of the other plan option. Alternatively, an employer can define a referenced-plan, and its contribution toward the referenced-plan can then be allocated to the plan of the participant’s choice. In this event, an anti-abuse rule must be satisfied, pursuant to which, the employer contribution to the referenced-plan has to be at least 66% of the single composite premium for each of the other plans.
The credit is limited by the average premium for the small group market in the State (or area within the State) in which the employee enrolls for coverage. In calculating the credit for employees in multiple states, the employer applies the average premium for the small group market in the State (or area within the State) separately for each employee, using the average state premium for the State in which the employee works.
Note: The Department of Health and Human Services determines the average state premium for the small group market in each state. For the 2010 tax year, these amounts are listed in the Form 8941 Instructions and Revenue Ruling 2010-13.
The cap used for each employee, whether self-only or family, depends on the coverage taken. This is not affected by whether the employer’s contribution for that employee is determined with reference to the self-only plan, or whether an employer satisfies the uniformity requirement.
The small employer health insurance tax credit is available to qualifying employers for the 2010 tax year through 2013. Beginning 2014 when the exchanges are established, a credit is available for two years for employers who obtain health coverage through the exchange. Employers interested in obtaining the credit should review the FAQs, the Form 8941, and relevant guidance issued by the IRS.
About the Authors:
Aimee San Ramon is a Senior Associate with CBIZ MHM, LLC. Ms. San Ramon is based in the CBIZ Bethesda, Maryland office.
Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc. She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law. Ms. McLeese is based in the CBIZ Leawood, Kansas office.
The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. This information is not intended to replace or substitute for accounting or other professional advice. You must consult your own attorney or tax advisor for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein. As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.