Healthcare & Tax Implications

Unless you were hiding under a rock for the last several months, you’ve heard a thing or two about the Health Care debate. Whether you lean left or right, the Bill is here and our job now is to digest what it all means for our clients. Over the next few weeks, we’re going to take a look at some of the various tax implications of the Bill, so join us and let’s learn together.

Only portions of this far reaching legislation are effective immediately and that is where we will start today.

Small Business Health Care Tax Credit

The IRS took a giant first step in educating the public on the above credit by sending out millions of postcards beginning the week of April 19 that alert the small business owner of their opportunity. The first questions to ask yourself as a small business owner is whether or not you are eligible for the credit. For tax years beginning after 2009, the eligibility rules are as follows:

1. Must Provide Health Care Coverage: From the IRS website, “A qualifying employer must cover at
least 50 percent of the cost of health care coverage for some of its workers based on the single
rate.” Simply stated, if you aren’t paying for your employees health care, then no credit is available
to you.
2. How big is your business? Only a qualifying “Eligible Small Employer” can received the credit. It
doesn’t matter how you formed your business (C Corp, S Corp, LLC, Sole Proprietors, etc), but it
does matter how big your business is. A qualifying employer must have less than the equivalent of
25 full-time employees AND average annual wages must be below $50,000.
3. Contribution Rate: In addition to having to cover at least 50% of each employee’s cost, the amount
you contribute must also be uniform for each employee enrolled.
4. Both Taxable and Tax-Exempt businesses qualify

In addition to the above eligibility requirements, there are some other items of interest to note:

• The Health Care Act provides a maximum Credit of up to 35% of the cost of qualifying employee
health insurance for tax years beginning after 2009 and before 2014. The maximum credit rate
jumps up to 50% after that. Please not that the Credit can be as high as 35%, but can be reduced
according the number of full time employees and average wage rate. When it comes time to make
this calculation, you would be best served to check with your CPA or tax professional.
• The Credit is not available for the Owner or members of the Owner’s family.
• Carryback and Carryover options do exist. If you are unable to use your credit in a given year, it
can be carried back one year and carried forward for up to twenty years. Since the bill was enacted
for 2010 and forward, only the Carryover option is available in 2010.

The IRS has been very active in educating the public about this credit and the opportunity that exists. They already have a FAQ section, a YouTube video explaining who, what, why and how, and even examples of how the credit applies to employers in different circumstances. The following link is a great starting point to get to any of these sections http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6

Tax-Free Employer-Provided Health Coverage Now Available for Children under Age 27

Health coverage provided for an employee's child under the age of 27 is now, generally, tax-free to the employee. This became effective March 30th of this year. The IRS announced on April 27, that the changes in this area immediately allowed employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit. IRS Notice 2010-38 explains in detail these changes and provided further guidance. Briefly, this health care tax benefit applies to various workplace and retiree health plans as well as to self-employed individuals who qualify for the self-employed health insurance deduction. Further a child includes a son, daughter, stepchild, and adopted or eligible foster children. There is no requirement that the child generally qualify as a dependent for tax purposes.

Join us again next week as we look a little further into the new legislation’s tax implications for HSA, MSA and FSA plans and other various aspects to be aware of as we move further in to the 2010 tax year with these new regulations.