Survey after survey reveals that health insurance is among the top fringe benefits sought by employees. For many security dealers and integration businesses, offering health insurance is critical to attracting the kind of workers they need for success. Fortunately, whether the business presently offers health insurance or is merely considering offering it, there is a small silver lining in the form of a unique, often-overlooked tax credit for small employers that will be increased by the Affordable Care Act (ACA) — otherwise known as Obamacare.
As the tax deadline approaches for many small security businesses, owners and managers are looking for ways to reduce tax bills. Although the ACA does not require that a business provide health insurance, it does offer tax credits for eligible small businesses that provide insurance to their employees for the first time, or maintain the coverage they already have.
The Internal Revenue Service is encouraging small businesses to explore and, if qualified, claim this unique health insurance coverage tax credit. In 2011, two out of every five U.S. businesses qualified for these tax credits; thus, this could affect 19.3 million employees and possibly provide $15.4 billion in tax credits to small businesses.
In fact, many small businesses with 25 or fewer employees are already taking advantage of this new tax credit — a direct reduction of their tax bill of up to 35 percent of their health insurance costs. Beginning in 2014, this tax credit will go up to 50 percent.
The Small Employer Credit
A security dealer, reseller or integration business that provides healthcare 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 lower the average salary and the fewer FTEs the business has, the higher the tax credit. The maximum credit is 35 percent this year, and it rises to 50 percent of the annual premium paid for 2014 and thereafter.
The IRS recently proposed guidelines for the small employer tax credit created by the ACA. Among other things, the guidelines 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, 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 full-time equivalent employees) must have in place a contribution arrangement through which the security dealer can make a non-elective 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 percent of the QHP’s premium cost. In addition, the average annual wages of the employer’s FTEs cannot currently exceed $50,000.
The IRS has said certain higher-income individuals — specifically, sole proprietors, partners in partnerships, or shareholders owning more than 2 percent of the stock in an S corporation and any owners of more than 5 percent of 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 excluded from the definition of employee for those purposes.
The IRS guidelines also contain transition rules if an eligible small employer’s plan year begins on a date other than the first day of its taxable year. About 30 percent of employers in the small group market do not have plans that run on a calendar year, so the new rules mean premiums paid under their old plans — as well as what they are paying when they switch to the exchange — will be eligible for the tax credit.
All qualifying security dealers and integration businesses are also eligible to buy health insurance on a special exchange known as Small Business Health Options Program (SHOP).
Marketplaces, Exchanges and SHOP
One of the key features of the ACA is the creation of Health Insurance Exchanges — or Marketplaces — for the sale of health insurance. For employers with less than 50 employees, private exchanges will compete with the public Small Business Health Option Program (SHOP) exchanges each state is required to have.
Small employers that want to make health insurance coverage available to their employees can choose to offer those employees coverage from the SHOP. Should a small employer decide to offer this type of coverage, it has the ability to select which plans to make available — 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.
Open enrollment for SHOP coverage was scheduled to begin on Oct. 1, and coverage will become effective Jan. 1, 2014. Commencing in 2016, the SHOP will be open for employers with up to 100 full-time equivalent employees.
Changes are Coming
Every systems integrator and security dealer will see a number of important changes to the tax credit for tax years beginning in 2014 and forward. As mentioned, the credit amount increases to 50 percent of premiums paid by eligible small employers. Cost-of-living adjustments are made to the average annual wage phaseout amounts (the credit is phased out gradually when average annual wages exceed certain amounts).
Another difference involves the two-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 two-year limit, which 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 two more years in 2014 and later.
Not surprisingly, employers providing health care benefits also face administrative reporting requirements under the ACA. In general, the business must use the IRS’s Form 8941 to calculate the credit. Most small businesses will include the amount as part of the general business credit on their annual income tax return. Plus, as a small business employer, the security business may be able to carry the credit back or forward. Many small business owners who currently buy their own individual healthcare coverage in the private market may be eligible to take advantage of new cost savings as well.
For a physical or electronic security business eligible for the tax credit for the 2013 tax year, but that forgot to claim it on the annual tax return, there’s still time to file an amended return.
Naturally, in order to fully understand all of the pros and cons of the Small Employer Health Insurance Tax Credit, professional assistance is strongly recommended.
Mark E. Battersby is a freelance writer that specializes in tax-related issues. Email him at MEBatt12@earthlink.net.