A lighter load

Year-after-year, survey-after-survey reveals health insurance to be among the top benefits sought by employees. For many growers, offering health insurance is critical to attracting the kind of workers they need to succeed. Fortunately, whether the business offers health insurance or is merely considering offering it, there is a sliver of silver lining in the Affordable Care Act (ACA) in the form of a unique, often-overlooked tax credit for small employers.

Created as part of the ACA, the Small Employer Health Insurance Tax Credit is already benefiting businesses with 25 or fewer employees. In fact, the IRS is encouraging small businesses to explore and, if qualified, claim their share of the estimated $15.4 billion savings for small businesses.
 

The small employer credit

Any nursery business that provides health care coverage is eligible for the Small Employer Health Insurance Tax Credit if, for the current 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 nursery has. The maximum credit is 35 percent this year and rises to a whopping 50 percent of the annual health insurance premiums paid for employees for 2014 and thereafter.

Unfortunately, the full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees (FTEs) and whose employees have average annual full-time equivalent wages of less than $25,000. The salaries of a nursery owner and those of the owner’s family are not counted in determining the average salary.

While any qualifying grower is eligible to receive the Small Business Health Care Tax Credit, it works on a sliding scale and is specifically targeted for those businesses with low- and moderate-income workers. To qualify for tax credits, the employer must also contribute at least 50 percent toward the employee’s premium cost.
 

New IRS rules

Although this unique credit has been available to employers since 2010, the IRS only recently proposed guidelines for the ACA’s small employer tax credit. The guidelines address eligibility requirements for employers that wish to claim the credit, provide guidance on how to calculate and claim the credit, and explain the effect on estimated taxes, the alternative minimum tax and, of course, tax deductions.

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 grower can make a non-elective contribution on behalf of each employee who enrolls in a qualified health plan (QHP) offered by the employer.

The amount of that contribution must also 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. Through 2013, the maximum credit is 35 percent of premiums paid by small business employers. For tax years beginning in 2014 or later, the maximum credit will increase to 50 percent of premiums paid by the employer.

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 nevertheless excluded from the definition of employee for those purposes.

The IRS guidelines also contain transition rules for eligible small employers whose plan year begins on a date other than the first day of its taxable year. As about 30 percent of employers in the small group market don’t have plans that run on a calendar year, the new rules mean premiums paid by the nursery business under their old plans as well as the new exchange will be eligible for the tax credit.

All qualifying nursery businesses are eligible to buy health insurance on a special exchange known as Small Business Health Options Program (SHOP).
 

Exchanges and SHOP

One of the key features of the ACA was the creation of health insurance exchanges, or marketplaces, for the sale of health insurance. For employers with fewer 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 to its employees — and it is not required to offer all coverages sold through the SHOP to its employees.

Although small businesses have been able to apply through paper applications since Oct. 1, 2013, the Obama administration recently announced a yearlong delay of online enrollment for those looking to purchase health coverage through the federal-run SHOP exchanges. Employers who want to buy marketplace 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 businesses seeking healthcare coverage.
 

Changes are coming

Every grower 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 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.
 

Paperwork

Employers providing health care benefits also face administrative reporting requirements under the ACA. In general, nurseries must use the IRS’s Form 8941 to calculate the credit. Most will include the amount as part of the general business credit on their annual income tax return. As a small business employer, the business may be able to carry the credit back or forward.

According to the Government Accountability Office (GAO), fewer small employers claimed the Small Employer Health Insurance Tax Credit in tax year 2010 than were estimated to be eligible. While 170,300 small employers claimed a total of $468 million from the credit, estimates of the eligible pool by government agencies and small business advocacy groups ranged from 1.4 million to 4 million.

Among the factors reportedly limiting the credit’s use is that most very small employers, 83 percent by one estimate, do not offer health insurance. For some, the credit is not large enough to incentivize employers to begin offering insurance. Complex rules on FTEs and average wages may also limit use. In addition, tax preparer groups reported the time needed to calculate the credit deterred claims.

As the tax filing deadline approaches for many small 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 choose to provide insurance to their employees for the first time, or maintain their coverage.

The ugly truth is that one in four small business owners in the U.S. are uninsured. The ACA will allow 83 percent of currently uninsured small business owners to become eligible for healthcare coverage. Additionally, 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. For a grower 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. To fully understand the Small Employer Health Insurance Tax Credit, professional assistance is strongly recommended.

Mark Battersby is a freelance writer in Pennsylvania. His tax and financial features have appeared in leading business magazines and trade journals for more than 25 years.