Care Act (ACA) contains
a tax incentive for certain small employers to offer
their employees a health insurance plan, and pay for
at least half the cost. Employers eligible to take
advantage of this provision are under the 50-worker
"employer mandate" threshold, and thus not compelled
by the ACA to "pay or play."
Tax Credit Basics
For tax years 2010 to 2013, there is a maximum tax
credit of 35 percent of premiums paid by qualified
small business employers (25 percent of premiums for
small tax-exempt organizations).
There are changes to the tax credit for 2014. The
IRS recently proposed regulations updating and
fine-tuning the original Section 45R rules governing
the credit, beginning next year. In addition, the
tax break will be more valuable to eligible
employers starting in 2014.
In order to qualify for the full tax credit,
employers cannot have more than 10 full-time
employees or the equivalent with part-timers
factored in. The tax credit decreases if an employer
has between 10 and 24 full-time equivalent employees
or pays average wages of between $25,000 and
$50,000. It is unavailable for employers with 25 or
more employees and average wages above $50,000.
Here's what the new proposed regulations add to the
Must Purchase SHOP coverage. In
addition to the well-known public health exchanges,
which are scheduled to be open for business October
1, the ACA provided for a small employer version --
the Small business Health Option Plan (SHOP). These
state-based online marketplaces are scheduled to be
up and running October 1 for coverage to begin
January 1, just like the regular public plans for
Up until now, in order to claim a tax credit, small
employers could find a suitable health plan any way
they chose. The new proposed IRS regulations state
that small employers can only be eligible for tax
credits if they choose coverage via the SHOP
Must Comply with Other Restrictions. Beyond
the number-of-employees limit under which
employers can claim a federal tax credit, there is a
limit on the amount the employees can earn.
Specifically, the aggregate employees' salaries
cannot exceed an average of $50,000 per employee.
This cap will be inflation-adjusted beginning next
Also, the percentage of the health plan's value paid
by the employer must be the same for all employees.
(Different tax credit formulas apply to tax-exempt
Sole proprietors, partners in a partnership and
shareholders who own more than 2 percent of a S
corporation's stock are not counted as "employees"
for purposes of the size or average salary
calculations. The same applies to family members
working in the business.
Bigger Tax Credit Coming in 2014
How big a tax credit is available? The maximum credit,
determined as a percentage of the business
employer's contribution to the employee's health
benefit (based on single employee coverage),
will increase from 35 percent this year to 50
percent in 2014.
The maximum credit for eligible tax-exempt
organizations increases from 25 percent to 35
percent, beginning in 2014.
Two Year Limit Ahead
The credit can only be taken for two
years, beginning in 2014. But you can still claim
the credit for two years beginning in 2014 (for 2014
and 2015) even if you claimed it for tax years
before 2014. In other words, you could claim it for
this year, with the lower maximum credit amount,
without affecting what you do for next year. To
claim the credit, you must complete an IRS form.
The credit, or a portion of it, can be carried back
or forward if your tax liability is lower than the
Transition rules allow you to be eligible for the
tax credit for 2014 even if your plan year begins
later than January 1.
new regulations make it clear you cannot create a
new but identical business entity simply for the
sake of allowing you to get around the two-year
For more detailed information, please call Robert
516-248-7361 or click
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be happy to answer any questions you may have.
Thomson Reuters/Tax & Accounting