Small Employer Tax Credit in California with PPACA

Okay, I hope you are ready for this one!  You might want to have a cup of coffee along with this one since it’s not as exciting as the last few blogs I’ve written for the PPACA.  The goal of the Small Employer Tax Credit is to encourage employers to offer coverage for the first time and to encourage employers who currently offer employee benefits to maintain that coverage.

The Small Employer Tax Credit begins for the tax year 2010 and is retroactive to January 1, 2010.  If your business qualifies for the tax credit you will receive it when your taxes are filed.  A credit is better than a deduction generally because it offsets what you owe! The tax credit will be in place for the tax years 2010 through 2013.  An enhanced version of the tax credit will take place in 2014, but the details are not out yet.

Before I tell you how it works, I want to make sure you understand, I am not a tax expert!  You should contact a tax consultant when it comes to this kind of stuff.  I am just giving you the basic information to help you determine if this will apply to you since this is all about employee benefits for which I do consider myself an expert.  My guess is that there will be a lot of businesses (at least in our area) who don’t qualify for the tax credit because of the salary cap.  I think this was mainly designed for employers in Wisconsin!

Here’s the qualifications:  The credit works for small employers with less than 25 full time equivalent employees (FTE).  Full time equivalent employees are based on hours not bodies and I will provide a link to help you decide if this will apply to you.  Owners and immediate family members are excluded from the calculation.  The income average has to be less than either $25,000 or $50,000 per FTE depending on the number of FTE’s you have.

The credit applies only to the amount of premium paid by the employer and the employer must contribute at least 50% of the employee premium (That’s a California law by the way).  The contribution that the employer makes for the employee must be uniform for all employees.  This means the employer cannot pay a higher contribution for some employees (i.e. executives or managers) than they do for other employees.  Since the contribution has to be the same percentage for all employees, those employers contributing a flat dollar amount towards the employee cost will not qualify.

The Department of Health and Human Services (HHS) has set a maximum premium amount based on each State’s average cost.  In California, we have on average nine rating areas for premiums and believe it or not, California has fairly low premium amounts compared to many other States, especially on the east coast!  The maximum premium amount to be used for the tax credit in California is $385 per month for single employees and $913 per month for family cost.

An employer would take the percentage they pay toward the cost of premiums and the credit is applied up to this amount.  For example if the cost of an employees premium is $200 and the employer pays 80% of the cost the premium credit is calculated something like this $200 X 80% = $160.  Next, $160 x 35% = $56.  If an employer pays the premium for family coverage the same rule would apply.  When you do the simple math it may not seem like a very big credit, but let’s face it, a $56 credit is better than $0 so I say take a look and see if you can qualify.  Besides I’m sure your tax person would love to help you.  They think this kind of thing is cool.

For employers with 2 to 9 FTE, the income average must be less than $25,000 per year per FTE and the maximum credit can be as high as 35%.  Employers with 10 to 24 FTE, the income average must be less than $50,000 per year per FTE but the credit is reduced based on an IRS secret formula.

Also, for employers who own more than one business (my understanding is ANY common ownership) the companies will be joined for purposes of applying the tax credit.

As you can see this can be pretty complicated.  You may need a second cup of coffee and I’m sure you’ll need to read this a second time!  Here are some useful links:

Tax Credit Calculator:    http://www.nfib.com/issues-elections/healthcare/credit-calculator

IRS guidelines:    http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6

Please remember I am not a tax expert!  Did I say that already?