Changes to Small Business Health Care Tax Credit
Small businesses should be aware of changes to the small business health care tax credit for tax years beginning in 2014. Under the Affordable Care Act, this tax credit is available to eligible small employers that provide health care to their employees. Here's a summary of the recent changes that may affect your business:
For 2014, the credit percentage increased from 35 percent to 50 percent of employer-paid premiums. For tax-exempt employers, the percentage increased from 25 percent to 35 percent.
Small businesses may claim the credit for only two consecutive taxable years beginning in tax year 2014 and beyond.
For 2014, the credit is phased out beginning when average wages equal $25,400 and is fully phased out when average wages exceed $50,800. The average wage phase-out is adjusted annually for inflation.
Generally, small businesses are required to purchase a Qualified Health Plan from a Small Business Health Options Program Marketplace to be eligible to claim the credit. Transition relief from this requirement is available to certain small employers.
Small employers may still be eligible to claim the tax credit for tax years 2010 through 2013. Companies that were eligible to claim this credit for those prior years -- but did not do so -- may consider amending prior years' returns if they're eligible to do so in order to claim the credit. Contact your tax pro for more information about the small business health care tax credit or assistance with completing Form 8941, Credit for Small Employer Health Insurance Premiums.
Alternatively, companies could just pay the premiums directly to the insurance carrier.
Back in November 2014, however, the Department of Labor (DOL) declared that companies reimbursing employees for medical care instead of offering a health care plan is equivalent to a health plan and is subject to the Affordable Care Act (ACA). And since those reimbursement arrangements failed to meet ACA requirements in two ways -- that is, the condition that group health plans have no annual limits on benefits, and also that no co-pay for certain preventive health services must be paid -- they were ruled to be noncompliant with the law.
$36,500 Per Employee Penalty
This DOL ruling doubled down on a 2013 decree by the IRS saying essentially the same thing. The kicker was that, beginning in 2014, companies with such reimbursement arrangements in place would be subject to a $36,500 penalty per employee.
The only remedy offered by the DOL was for companies to gross up those contributions (that is, add to them enough money to cover the tax liability employees would incur as a result of receiving the payments), plus make it clear to employees that they could do whatever they wanted with all of the money they received. In other words, they could not be required to use it to pay for health coverage.
The IRS's latest ruling, Notice 2015-17, which the tax agency says is in sync with the most recent DOL policy on the matter, gives everyone time to catch their breath.
Specifically, small businesses with reimbursement plans in place will not be penalized unless they maintain them beyond June 30 of this year. Small businesses are also off the hook for having to file Form 8928, which is the form that covers failures to satisfy group health plan requirements. Originally that form would have to have been filed with companies' 2014 tax returns.
The reprieve also applies to plans that help retirees pick up the tab for Medicare Part B and D premiums.
Employees with Subchapter S Corp Stock
Employees who own at least 2 percent of their employers' stock (if the company is a Subchapter S corp) might come in for different treatment. Such employees were required to report the premium reimbursement payments as income on their 1040s, even though the payments were not subject to payroll tax. But those same employees could also take a deduction equal to the amount of that income, leaving them tax-neutral.
In IRS Notice 2015-17, the tax agency warns that it and the DOL "are contemplating publication of additional guidance on the application of the market reforms to a 2 percent shareholder-employee healthcare arrangement." Until then, however, the companies are off the hook. So, too, are the employees who will continue to be allowed to deduct that income as self-employed health insurance premiums.
The Notice reconciles the IRS with a position the DOL had taken earlier -- that is, declaring reimbursement plans as merely taxable payments to employees doesn't prevent them from being deemed health plans. That means the only way to help employees secure health coverage without having a bona fide health plan is to just give each employee a raise and hope they will use it to buy their own health coverage. (Keep in mind, small business with fewer than 50 employees and full-time equivalents are not required to provide health plans under the ACA.)
Notice 2015-17 also made it clear that the ACA's market reforms, as they pertain to this issue, don't extend to arrangements covering only a single employee (regardless of whether that employee is a 2 percent-or-more shareholder). That means if you own your company and aren't an employee, but have one employee and want to reimburse that person for the cost of buying individual coverage, you won't be subject to any penalties.
Monthly Health Allowances
Meanwhile, the entrepreneurial spirit of America is at work to help small businesses that just want to help employees pay for individual coverage, but don't want to run afoul of the IRS and DOL. One benefits company offers a web-based defined contribution arrangement it calls "Individual Health Reimbursement for Small Business," which gives employees access to a "monthly health allowance." However, companies considering such arrangements should consult legal counsel for an opinion as to whether the plan would pass muster with the IRS and DOL.