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Small employers eligible for tax credit for providing health insurance
It applies to those with 25 or fewer full-time employees paid an average annual salary of less than $50,000.
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Offering health insurance is not only popular with employees, it is critical to attracting the kind of workers a practice or business needs to succeed. Fortunately, whether the optometric practice presently offers health insurance or is merely considering offering it, there is a sliver of silver lining in the form of a unique, often-overlooked tax credit for small employers.
Created as part of the Affordable Care Act (ACA), the dreaded and controversial “ObamaCare,” the Small Employer Health Insurance Tax Credit is already benefiting practices and businesses with 25 or fewer employees and has not been caught up in the defund or repeal arguments. In fact, the Internal Revenue Service is encouraging small employers to explore and, if qualified, claim this unique health insurance coverage tax credit.
Statistics from 2011 reveal that two out of five employers will qualify for these tax credits. This could affect 19.3 million employees and possibly provide $15.4 billion in tax credits to smaller employers.
The small employer tax credit
Mark E. Battersby
Any optometrist or optometric practice providing health care coverage is eligible for the Small Employer Health Insurance Tax Credit if, for the tax year, they have 25 or fewer full-time equivalent (FTE) employees who are paid an average annual salary of less than $50,000. The tax credits are higher the lower the average salary and the fewer FTEs the optometry practice has. The maximum credit was 35% for 2013, rising to 50% of the annual premium paid in 2014 and thereafter.
Unfortunately, the full amount of the credit is available only to an employer with 10 or fewer FTE employees and whose employees have average annual FTE wages from the employer of less than $25,000.
While any qualifying optometry practice is eligible to receive the Small Business Health Care Tax Credit, it works on a sliding scale specifically targeted to those practices with low- and moderate-income workers. Bottom line: the smaller the practice, the bigger the credit.
To qualify for tax credits, the employer must also contribute at least 50% toward the employee’s premium cost. Neither the salary of the optometrist or practice’s principals, nor those of their families, are counted when determining the average salary amount.
New IRS rules
Guidelines recently introduced by the IRS address the eligibility requirements for employers to claim the credit, provide guidance on how to calculate and claim the credit, and explain the effect on estimated tax, the alternative minimum tax and, of course, tax deductions.
Under the guidelines, to take advantage of this tax credit, small employers (those with 25 or fewer FTE employees) must have in place an arrangement through which the optometry practice can make a nonelective contribution on behalf of each employee who enrolls in a qualified health plan (QHP) offered by the employer.
The contribution amount must be at least 50% of the QHP’s premium cost. In addition, the average annual wages of the employer’s FTEs cannot currently exceed $50,000. Through 2013, the maximum credit was 35% of premiums paid by small business employers. For tax years beginning in 2014 or later, the maximum credit will increase to 50% of premiums paid by optometry practices/employers.
As mentioned, the IRS has said certain higher-income individuals, specifically sole proprietors, partners in partnerships or shareholders owning more than 2% of the stock in an S corporation, and any principal with a more than 5% interest in other businesses, do not have to be counted as employees when calculating the average wage. Although the tax law does not specifically refer to spouses, the IRS says that spouses are nevertheless excluded from the definition of employee for those purposes.
The IRS’s guidelines also contain transition rules for eligible small employers with plan years that begin on a date other than the first day of its taxable year. Because about 30% of employers in the small group market do not have plans that run on a calendar year, the new rules mean premiums paid by the optometry practice under their old plans as well as what they are paying when they switch to the exchange will be eligible for the tax credit.
Marketplaces, exchanges and SHOP
One of the ACA’s key features was the creation of a Small Business Health Options Program (SHOP). For employers with fewer than 50 employees, the SHOP exchange, the federal government’s website, was designed to help small businesses comparison shop for employee plans.
Should a small employer decide to offer this type of coverage, it can select which plans to make available to its employees – and it is not required to offer all coverages sold through the SHOP to its employees. However, if a small employer determines that SHOP plans will be made available to its employees, then all full-time employees must be offered this coverage.
Although small professional practices and businesses have been able to apply through paper applications since Oct. 1, 2013, the Obama administration recently announced a year-long delay of online enrollment for those looking to purchase health coverage through the federal-run SHOP exchanges. Employers who want to buy qualifying plans for their workers now will need to go through an agent, broker or insurance company. Fortunately, with a few exceptions, SHOPs in states running their own exchanges have had a smoother rollout and remain a viable option for small optometry practices seeking health care coverage.
Changes to come in 2014
Every optometric professional will see a number of important changes to the tax credit for tax years beginning in 2014. As mentioned, the credit amount increases to 50% of premiums paid by eligible small employers. Cost-of-living adjustments are made to the average annual wage phase-out amounts. (The credit is phased out gradually when average annual wages exceed certain amounts.)
Another difference involves the 2-year limit on taking the credit. Before 2014, there was no time limit on taking the credit, so employers that qualified could have taken it in 2010, 2011, 2012 and 2013. Beginning in 2014, there is a 2-year limit that begins with the first year the employer files Form 8941, Credit for Small Employer Health Insurance Premiums. However, employers that took the credit before 2014 can take the credit for 2 more years in 2014 and later.
Administrative reporting requirements
Not too surprisingly, employers providing health care benefits also face administrative reporting requirements under the ACA. In general, the optometry practice must use IRS Form 8941 to calculate the credit. Most small practices will include the amount as part of the general business credit on their annual income tax return. Plus, as a small business employer, an optometric practice may be able to carry the credit back or forward to another tax period.
According to the Government Accountability Office (GAO), Congress’s investigative arm, few of the small employers estimated to be eligible actually claimed the Small Employer Health Insurance Tax Credit in the 2010 tax year. While 170,300 small employers reaped an estimated $468 million in tax credits, government agencies and small business advocacy groups believed the pool of eligible businesses ranged from 1.4 million to 4 million.
Among the factors reportedly limiting the credit’s use is that most very small employers, 83% by one estimate, do not offer health insurance. What’s more, at least according to some experts, the credit is not large enough to incentivize employers to encourage them to begin offering insurance. Complex rules on FTE employees and average wages are also apparently limiting use. In addition, tax preparer groups the GAO met with generally said the time needed to calculate the credit deterred claims.
As the tax filing deadline approaches, many optometrists are looking for ways to reduce their – and their optometry practice’s – tax bills. Although the ACA does not require that a practice provide health insurance, it does offer tax credits for eligible small practices that choose to provide insurance to their employees for the first time or maintain the coverage they already have.
The ugly truth is that one in four small business owners in the U.S. are uninsured. Thanks to the ACA they can now afford their own health insurance. In fact, the ACA will allow 83% of currently uninsured small business owners to become eligible for health care coverage. Additionally, many optometrists and other professionals along with small business owners who currently buy their own health care coverage in the private market may be eligible to take advantage of new cost savings as well.
Finally, for an optometry practice that was eligible for the tax credit for the 2013 tax year but forgot to claim it on the annual tax return, there is still time to file an amended return. Naturally, to fully understand all of the pros and cons of the Small Employer Health Insurance Tax Credit including the retroactive provision, professional assistance is strongly recommended.