Health Care Legislation

Most people have at least some awareness the legislation entitled The Patient Protection and Affordable Care Act.

However, many people are not aware that this legislation includes 500 reformation provisions with multiple serious implications for small business owners.

Over 40 of these stipulations affect our Internal Revenue Code; which, in turn, directly affects incentives and tax breaks to both individuals and small businesses in relation to health-care expenses.

We have assembled some facts to help you be better informed of this Act, how it is being implemented, and how it may affect you.

Big Break for Self-Employed Health Insurance Deduction

Background – A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of himself, his spouse and his dependents subject to the following requirements (Code Sec. 162(l)(1)(B)):

The deduction cannot exceed the individual’s net earnings from self-employment derived from the trade or business for which the plan providing the coverage is established.

For a more-than-2% S corporation shareholder, that shareholder’s wages from the S corporation are treated as his earned income.

No individual who is eligible to participate in any subsidized health plan maintained by any employer of the individual or of the individual’s spouse is entitled to the deduction. This test for eligibility is made for each calendar month and applied separately to long-term care insurance.

New Benefit – As part of the new health care reform law (Notice 2010-38), this deduction, as of March 30, 2010, also applies to a self-employed individual’s child under the age of 27 as of the end of the year. The definition of “child” for this purpose includes the individual’s:

child,
stepchild,
legally-adopted individual,
an individual lawfully placed with the employee for legal adoption, and
an eligible foster child.

Previously, the child would have had to qualify as a dependent. No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year. Even a married child is included by this definition! (But the married child’s spouse and/or children are not covered.) A child attains age 27 on the 27th anniversary of the date the child was born (for example, a child born on April 10, 1983 attained age 27 on April 10, 2010).

If the self-employed individual utilizes a group policy provided by an association, be aware that although group policies offered by insurers are also required to cover older children, they are only required for children under the age of 26. Also, that law change only becomes effective for plan years beginning on or after September 23, 2010.

Employer Tax-Free Medical Benefits Available to Children under Age 27

As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. Generally, under pre-Act law, to be a qualifying child of a taxpayer for this purpose, the child must have been the taxpayer’s dependent under age 19 (or under age 24 in the case of a full-time student).

Child – Broad Definition for this Purpose
Other than age, the “child” definition has no other restriction. Thus, there is no income or marital restrictions.

These changes immediately allow employers with cafeteria plans – plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits – to permit employees to begin making pre-tax contributions to pay for this expanded benefit.

Employees with children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child.

Employees may immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided no later than plan years beginning on or after Sept. 23, 2010.

The definition of “child” for this purpose includes the individual’s:

child,
stepchild,
legally-adopted individual,
an individual lawfully placed with the employee for legal adoption, and
an eligible foster child.

No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year. Even a married child is included by this definition! (But the married child’s spouse and/or children are not covered.) A child attains age 27 on the 27th anniversary of the date the child was born (for example, a child born on April 10, 1983 attained age 27 on April 10, 2010).

Contact your employer for further information regarding the employer’s plan related to this very beneficial change.

Expanding Coverage for Early Retirees

Too often, Americans who retire without employer-sponsored insurance and before they are eligible for Medicare see their life savings disappear because of high rates in the individual market. To preserve employer coverage for early retirees until more affordable coverage is available through the new Exchanges required to be established by 2014, the new law creates a $5 billion program to provide needed financial help for employment-based plans to continue to provide valuable coverage to people who retire between the ages of 55 and 65, as well as their spouses and dependents.

The program provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents. The Secretary will reimburse sponsors for certain claims between $15,000 and $90,000 (with those amounts being indexed for plan years starting on or after October 1, 2011).

Employers wishing to participate in the program can obtain additional information on the Department of Health Services website.

Free Choice Vouchers

Employers who offer minimum essential coverage through an eligible employer-sponsored plan and are paying a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage though the insurance exchange.

Qualified Employee – A qualified employee is one:
Who does not participate in the employer-sponsored plan;

Whose required contribution to the employer exceeds 8%, but does not exceed 9.5% of household income; and

Whose income does not exceed 400% of the poverty line for the family.

Inflation Adjustments – After 2014, the credit percentage rates will be indexed to reflect the rate of premium growth over income growth between the preceding calendar year and 2013.

Voucher Value – The voucher value will be equal to the monthly cost of the individual’s self-only or family coverage had the employee participated in the employer’s plan.

Taxability of the Voucher – To the extent the voucher exceeds the premium of the health care chosen by the employee, the excess amount is included in the employee’s gross taxable income. Otherwise, there is no taxability.

Health Care Provisions

How Will the Health Care Legislation Affect You and Your Taxes?
In late March 2010, President Obama signed into law the new health care legislation. The legislation will affect virtually every individual in one way or another and will significantly impact the preparation of tax returns in the future. The provisions take effect over a period of years and are categorized by the year they become effective. Some of the provisions include additional taxes to offset the cost of the health care benefits included in the legislation for lower-income individuals.
Student Loan Forgiveness for Health Professionals
Previously, an individual’s gross income didn’t include cancellation of debt income that was attributable to the discharge of all or part of any student loan if the discharge was made under a provision of the loan – that all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.
New Law: The law has been amended to include amounts received by an individual in tax years beginning after Dec. 31, 2008; the gross income exclusion for amounts received under the National Health Service Corps loan repayment program or certain State loan repayment programs is modified to include any amount received by an individual under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas as determined by the State.
Investment Credit for Therapeutic Discovery Projects
In 2009 and 2010, for companies with 250 or fewer employees, a 50% nonrefundable investment tax credit is allowed for expenses paid or incurred for qualified investments in qualifying therapeutic discovery projects.
Qualifying Therapeutic Discovery Project – A qualifying therapeutic discovery project is one designed to develop a product, process, or therapy to diagnose, treat, or prevent diseases and afflictions by:
(1) Conducting pre-clinical activities, clinical trials, clinical studies, and research protocols, or
(2) Developing technology or products designed to diagnose diseases and conditions, including molecular and companion drugs and diagnostics, or to further the delivery or administration of therapeutics.
Insurance for Uninsured Americans with Pre-existing Conditions
Beginning July 1, 2010, a Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition. States have the option of running this new program in their state. If a state chooses not to do so, then the individual can utilize the Federal programs.
This program serves as a bridge to 2014, when all discrimination against pre-existing conditions will be prohibited.
To learn more about the plan for a particular state, visit the Department of Health and Human Services website.
Expanding Coverage for Early Retirees
Too often, Americans who retire without employer-sponsored insurance and before they are eligible for Medicare see their life savings disappear because of high rates in the individual market. To preserve employer coverage for early retirees until more affordable coverage is available through the new Exchanges required to be established by 2014, the new law creates a $5 billion program to provide needed financial help for employment-based plans to continue to provide valuable coverage to people who retire between the ages of 55 and 65, as well as their spouses and dependents.
The program provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents. The Secretary will reimburse sponsors for certain claims between $15,000 and $90,000 (with those amounts being indexed for plan years starting on or after October 1, 2011).
Employers wishing to participate in the program can obtain additional information on the Department of Health Services website.
Employer Tax-Free Medical Benefits Available to Children under Age 27
As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. Generally, under pre-Act law, to be a qualifying child of a taxpayer for this purpose, the child must have been the taxpayer’s dependent under age 19 (or under age 24 in the case of a full-time student).
Child – Broad Definition for this Purpose
Other than age, the “child” definition has no other restriction. Thus, there is no income or marital restrictions.
These changes immediately allow employers with cafeteria plans – plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits – to permit employees to begin making pre-tax contributions to pay for this expanded benefit.
Employees with children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child.
Employees may immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.
In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided no later than plan years beginning on or after Sept. 23, 2010.
The definition of “child” for this purpose includes the individual’s:
child,
stepchild,
legally-adopted individual,
an individual lawfully placed with the employee for legal adoption, and
an eligible foster child.
No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year. Even a married child is included by this definition! (But the married child’s spouse and/or children are not covered.) A child attains age 27 on the 27th anniversary of the date the child was born (for example, a child born on April 10, 1983 attained age 27 on April 10, 2010).
Contact your employer for further information regarding the employer’s plan related to this very beneficial change.
Big Break for Self-Employed Health Insurance Deduction
Background – A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of himself, his spouse and his dependents subject to the following requirements (Code Sec. 162(l)(1)(B)):
The deduction cannot exceed the individual’s net earnings from self-employment derived from the trade or business for which the plan providing the coverage is established.
For a more-than-2% S corporation shareholder, that shareholder’s wages from the S corporation are treated as his earned income.
No individual who is eligible to participate in any subsidized health plan maintained by any employer of the individual or of the individual’s spouse is entitled to the deduction. This test for eligibility is made for each calendar month and applied separately to long-term care insurance.
New Benefit – As part of the new health care reform law (Notice 2010-38), this deduction, as of March 30, 2010, also applies to a self-employed individual’s child under the age of 27 as of the end of the year. The definition of “child” for this purpose includes the individual’s:
child,
stepchild,
legally-adopted individual,
an individual lawfully placed with the employee for legal adoption, and
an eligible foster child.
Previously, the child would have had to qualify as a dependent. No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year. Even a married child is included by this definition! (But the married child’s spouse and/or children are not covered.) A child attains age 27 on the 27th anniversary of the date the child was born (for example, a child born on April 10, 1983 attained age 27 on April 10, 2010).
If the self-employed individual utilizes a group policy provided by an association, be aware that although group policies offered by insurers are also required to cover older children, they are only required for children under the age of 26. Also, that law change only becomes effective for plan years beginning on or after September 23, 2010.
Tax Credits for Small Employers Offering Health Coverage
The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. The term “nonelective contribution” means an employer contribution other than an employer contribution pursuant to a salary reduction arrangement.
o 2010 through 2013 – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000 will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for its employees. (Note, however, that the phase-out of the credit operates in such a way that an employer with exactly 25 full-time equivalent employees or with average annual wages exactly equal to $50,000 is not eligible for the credit. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000.
o 2014 and Later – In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.
An eligible small employer generally is an employer with no more than 25 full-time equivalent employees employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.
The credit percentage that can be claimed varies with the number of employees and average wages. The full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages (AAEW) from the employer of less than $25,000.
Calculating the credit amount – The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage (shown in the table below) and subject to the phase-outs discussed later:
(1) The amount of contributions the eligible small employer made on behalf of the employees during the tax year for the qualifying health coverage.
(2) The amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. Contributions under this method are determined by multiplying the benchmark premium by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer. (See table below)
*For years after 2013, only available for a maximum coverage period of two consecutive tax years
Computing the Credit Phase-Out – The full credit is only available to eligible small employers with 10 or less full-time equivalent employees with an average annual full-time equivalent wage (AAEW) of $25,000 or less. If either or both of these thresholds are exceeded, then the credit is reduced.
There is no credit reduction if there are 10 or less full-time equivalent employees FTEs with an AAEW of $25,000 or less.
There is no credit if the full-time equivalent employees exceed 25 or the AAEW exceeds $50,000.
To figure the reduction of credit when the limits are exceeded, the number of the employer’s full-time equivalent employees and average annual full-time equivalent wages (AAEW) for the year must be determined.
Figuring the number of full-time equivalent employees – An employer’s full-time equivalent employees (FTEs) is determined by dividing the total hours the employer pays wages during the year (but not more than 2,080 hours per employee) by 2,080. The result, if not a whole number, is then rounded down to the next lowest whole number if any.
Calculating average annual wages (AAEW) – Average annual equivalent wages is determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer’s full-time equivalent employees for the year (rounded down to the nearest $1,000 if need be).
Credit reduction – If the number of full-time equivalent employees exceeds 10 or if AAEW exceed $25,000, the amount of the credit is reduced (but not below zero). Both reductions can apply at the same time!
Example – Joe owns a small California wood working business and has 12 employees, not counting himself or family members. The total FICA wages (without regard for wage base limitations) for the year were $297,500 and total hours worked by his employees during the year were 24,400. None of his employees worked more than 2,080 hours during the year. Joe made nonelective contributions to purchase health insurance for his employees in the amount of $49,800 for the year. Joe’s credit is determined as follows:
• Small Business Benchmark Premium (from Table Below) = 12 × 4,628 = $55,536
• Smaller of actual premium paid or Benchmark premium = $49,800
• Tentative credit = $49,800 × 0.35 = $17,430
• Full-time equivalent employees (FTEs) = 24,400/2080= 11.7 rounded down = 11
• Average annual full-time equivalent wages (AAEW) = $297,500/11 = $27,045 rounded down = $27,000
• FTE Reduction = ((11-10)/15) x $17,430 = $1,162
• AAEW Reduction = ((27,000-25,000)/25,000) x $17,430 = $1,394
• Joe’s health insurance tax credit = $17,430 – $1,162- $1,394 = $14,874
Other Issues:
o The credit reduces the employer’s deduction for employee health insurance.
o Aggregation rules apply in determining the employer.
o Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for purposes of this credit.
o The credit is not available for a domestic employee of a sole proprietor of a business, and there’s a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members.
o The credit is a general business credit and can be carried back one year and forward for 20 years. However, because an unused credit amount cannot be carried back to a year before the effective date of the credit, any unused credit amounts for taxable years beginning in 2010 can only be carried forward.
o The credit is available for tax liability under the alternative minimum tax.
o The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is generally health insurance coverage purchased from an insurance company licensed under State law.
o For tax years beginning in years after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a State exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.
Please call this office if you have questions related to Tax Credits for Small Employers Offering Health Coverage.
Penalty for Not Being Insured
Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage, which includes:
o Government-sponsored programs (e.g., Medicare, Medicaid, Children’s Health Insurance Program),
o Eligible employer-sponsored plans,
o Plans in the individual market, and
o Certain grandfathered group health plans and other coverage as recognized by Health and Human Services (HHS) in coordination with IRS.
The penalty will be phased in beginning in 2014 and fully implemented in 2016.
Penalty – The penalty for noncompliance is the greater of:
(A) The sum of the monthly penalty amounts for months in the taxable year during which 1 or more such failures occurred, or
(B) An amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.
Monthly Penalty Amounts – The monthly penalty amount is an amount equal to 1/12 of the greater of the following amounts:
(A) Flat dollar amount – (See computation of the flat dollar amount below)
(B) Percentage of income – An amount equal to the applicable percentage for the year (see table below) multiplied by the amount the taxpayer’s household income for the year exceeds the taxpayer’s income tax filing threshold.
Flat Dollar Amount – The flat dollar amount is the lesser of:
1. The sum of the applicable dollar amounts (see table below) for all individuals who were not covered for the month or
2. 300% of the per adult penalty (maximum $1,875 in 2016).
Percentage of Income – The percentage of income used to determine the monthly penalty is phased in for 2014 through 2016 and inflation adjusted for years after 2016. The amounts are:
Applicable Dollar Amounts (Code Sec 5000A© (3)) – The amounts are:
If an applicable individual has not attained the age of 18 as of the beginning of a month, the “applicable dollar amount” for the month will be equal to one-half of the amount shown in the table.
Household Income – Household income is the sum of the modified adjusted gross incomes (MAGIs) of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified AGI means AGI increased by all tax-exempt interest and foreign earned income.
Penalty Enforcement – For a joint return, the individual and spouse are jointly liable for any penalty payment. The penalty is not subject to the enforcement provisions of subtitle F of the Code and the use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Noncompliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner. Therefore, enforcement is generally limited to seizing a refund.
Three-Month Grace Period – No penalty is assessed for individuals who do not maintain health insurance for a period of three months or less during the tax year. If an individual exceeds the three-month maximum during the taxable year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage. IRS is to provide rules when a coverage gap includes months in multiple calendar years.
Taxpayers Exempt from the Penalty –The coverage requirement does not apply to:
Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost “bronze plan” in the local Insurance Exchange exceeds 8% of household income for the year. After 2014, the 8% exemption is increased by the amount by which premium growth exceeds income growth. If self-only coverage is affordable to an employee, but family coverage is unaffordable, the employee is subject to the penalty if he does not maintain minimum essential coverage. However, any individual eligible for employer coverage due to a relationship with an employee (e.g. spouse or child of employee) is exempt from the penalty if that individual does not maintain minimum essential coverage because family coverage is not affordable (i.e., exceeds 8% of household income).
Taxpayers with income below the income tax filing threshold (which for 2010 generally is $9,350 for a single person or a married person filing separately and is $18,700 for married filing jointly).
Those exempted for religious reasons (who must be members of a recognized religious sect exempting them from self-employment taxes).
Individuals residing outside of the U.S. (who are deemed to maintain minimum essential coverage).
Individuals who are incarcerated or are not legally present in the U.S.
All members of Indian tribes.
Example – Monthly Penalty Amount – For the example, assume the following: Married taxpayers under the age of 65 who were not insured for five months during 2016. Their AGI for the year was $50,000 and they had $500 in tax-exempt interest income. For this example, use the 2010 income filing threshold, which for a married couple is $18,700 ($11,400 + $3,600 + $3,600). The penalty is determined as follows:
Flat Dollar Amount is the lesser of (1) the sum of the applicable dollar amounts for all individuals not insured (per person penalty) or (2) 300% of the dollar amount for the year (per family penalty). (1) = ($625 × 2) = $1,250 (the lesser amount)
(2) = 300% x $625 = $1,875 Percentage Income Amount is the applicable percentage for the year times the taxpayer’s income in excess of the income tax filing threshold for the taxpayer determined as follows: Taxpayer’s income = AGI plus tax-exempt income = $50,000 + $500 = $50,500 Percentage Amount = ($50,500 – $18,700) x 2.5% = $795
Thus, the taxpayer’s monthly penalty amount is 1/12 of the greater of the flat dollar amount ($1,250) or the percentage of income amount ($795). Thus, the taxpayer’s monthly penalty amount is: $104.17 ($1,250/12). Thus, the taxpayer will be subject to a penalty of the greater of $520.85 ($104.17 × 5 months) or an amount based on the national average premium for qualified health plans which have a bronze level of coverage.
Premium Assistance Credit
Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”.
“Exchange”
The Health Care Act requires each state to establish an “American Health Benefit Exchange” (“Exchange”) by Jan. 1, 2014, and requires insurers to provide QHPs to be sold on these Exchanges. The Premium Assistance Credit applies to QHPs purchased on an Exchange.
Applicable Taxpayers – Generally, these are individuals whose household income is at least 100%, but not more than 400% of the federal poverty line and who don’t receive health insurance under an employer plan, Medicaid or other acceptable coverage. Based upon the current poverty levels, the credit would phase-out at $42,420 for individuals and $88,200 for a family of four.
Enrollment – Eligible individuals will enroll in a plan offered through an Exchange and report his or her income to the Exchange. Based on the information provided to the Exchange, the individual will receive a premium assistance credit based on income.
Credit Paid Directly to Insurance Plan – IRS will pay the premium assistance credit amount directly to the insurance plan in which the individual is enrolled, and the individual will pay the difference between the premium and the credit. For employed individuals who purchase health insurance through a state Exchange, the premium payments will be made through payroll deductions.
Failure to Pay the Difference – Individuals who fail to pay all or part of the remaining premium amount will be given a mandatory three-month grace period before an involuntary termination of their participation in the plan.
Eligibility – Eligibility for the premium assistance credit will be based on the individual’s income for the tax year ending two years before the enrollment period. (Committee Report) The Secretary of Health and Human Services (HHS Secretary) must establish procedures for determining whether an individual who is applying for coverage in the individual market by a QHP offered through an Exchange, or who is claiming a premium assistance credit or reduced cost-sharing, meets the necessary eligibility requirements.
Amount of Premium Assistance Credit – The credit is based on the taxpayer’s household income level relative to the federal poverty line. The calculation is computed on a sliding scale starting at 2.0% of income for taxpayers at or above 100% of the poverty line and phasing out to 9.5% of income for those at 400% of the poverty line. The reference premium will be the second lowest cost silver plan available in the individual market in the rating area in which the taxpayer resides.
Deductibles & Co-payments – The standard out-of-pocket maximum limits will be reduced by:
Two-thirds for individuals with household incomes of more than 100% but not more than 200% of the poverty line,
One-half for individuals between 201% and 300% of the poverty line, and
One-third for individuals between 301% and 400% of the poverty line. The cost-sharing subsidy is available only for those months in which an individual receives the Premium Assistance Credit.
Free Choice Vouchers
Employers who offer minimum essential coverage through an eligible employer-sponsored plan and are paying a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage though the insurance exchange.
Qualified Employee – A qualified employee is one:
Who does not participate in the employer-sponsored plan;
Whose required contribution to the employer exceeds 8%, but does not exceed 9.5% of household income; and
Whose income does not exceed 400% of the poverty line for the family.
Inflation Adjustments – After 2014, the credit percentage rates will be indexed to reflect the rate of premium growth over income growth between the preceding calendar year and 2013.
Voucher Value – The voucher value will be equal to the monthly cost of the individual’s self-only or family coverage had the employee participated in the employer’s plan.
Taxability of the Voucher – To the extent the voucher exceeds the premium of the health care chosen by the employee, the excess amount is included in the employee’s gross taxable income. Otherwise, there is no taxability.
Large Employer Health Coverage Excise Tax
Large employers, generally those with 50 full-time employees in the prior calendar year, that:
o Do not offer coverage for all its full-time employees,
o Offer minimum essential coverage that is unaffordable (employee contribution is more than 9.5% of the employee’s household income), or
o Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60%,
Would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy discussed previously. (Code Sec. 4980H (a))
Interaction with Premium Credit
Generally, if an employee is offered affordable minimum essential coverage under an employer-sponsored plan, he is ineligible for a premium tax credit and cost-sharing reductions for health insurance purchased through a state exchange.
However, if the coverage is unaffordable (see above) or the plan’s share of benefits is less than 60%, then he is eligible, but only if he declines to enroll in the coverage and purchases coverage through the exchange instead.
Penalty – Employer Not Offering a Health Care Plan – An applicable large employer would be liable for the penalty (figured monthly) if the employer:
1) Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and
(2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.
The excise tax penalty for any month would be $167 ($2,000/12) times the number of full-time employees in excess of 30.
Example – No Health Care Plan – In January of 2014, an applicable large employer with 120 employees does not offer a health care plan to its employees. Ten of the employees are certified as being enrolled in January in a qualified plan and three of those employees were eligible for a premium tax credit. The penalty is $167 times the number of full-time employees in excess of 30. Thus, the penalty for the month of January is $15,030 ((120-30) x $167.00). If none of the 10 employees covered by qualified plans had received the premium tax credit, the employer would not have paid any penalty.
Penalty – Employees Qualify for Premium Tax Credits or Cost-Sharing Assistance – An applicable large employer would be liable for the penalty (figured monthly) if the employer:
(1) Offers to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and
(2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee;
The excise tax penalty for any month would be $250 ($3,000/12) times the number of full-time employees that receive premium tax credit or cost-sharing reductions through an Exchange but not to exceed the penalty imposed had the employer not offered health care insurance.
Example – Health Care Plan but Employees Qualify for Premium Tax Credit or Cost Sharing Reductions – In January of 2014, an applicable large employer with 120 employees offers a health care plan to its employees, but the cost of the plan does not meet the affordable criteria (employee contribution is more than 9.5% of the employee’s household income or the plan’s share of the total allowed cost of benefits is less than 60%) and 20 of the employees sign up for the insurance through an exchange and receive Premium Tax Credit or Cost-Sharing Reductions. The employer’s excise tax penalty is $250 times 20. Thus, the penalty for the month of January is $5,000.
Penalty – Decision Tree – The flow chart below provides an overview of the large employer health care excise tax.
Applicable Large Employer – An “applicable large employer” is one that employed an average of at least 50 “full-time employees” on business days during the preceding calendar year (for an employer that wasn’t in existence throughout the preceding calendar year, the determination is based on the average number of employees reasonably expected to be employed on business days in the current calendar year). But under an exemption, an employer will not be considered to employ more than 50 full-time employees if: (a) the employer’s workforce exceeds 50 full-time employees for 120 days, or fewer, during the calendar year; and (b) the employees in excess of 50 employed during that 120-day (or fewer) period were seasonal workers, e.g., retail workers employed exclusively during the holiday season. Special rules apply to construction industry employers.
Part-Time Employees – Solely for purposes of determining whether an employer is an applicable large employer, an employer will also have to include for that month the number of full-time employees determined by dividing (a) the aggregate number of hours of service of employees who are not full-time employees for the month by (b) 120.
Example – Equivalent Full-Time Employees – For his business, John has 45 full-time employees plus he has 20 part-time employees. His part-time employees for the month of January worked 960 hours. That is the equivalent of 8 (960/120) full-time employees. Thus, the number of John’s full-time employees for the month of January is 53 (45 + 8).
Penalty Deductibility – This excise tax penalty is nondeductible under the general rules for excise taxes.

Insurance for Uninsured Americans with Pre-existing Conditions

Beginning July 1, 2010, a Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition.

States have the option of running this new program in their state. If a state chooses not to do so, then the individual can utilize the Federal programs.

This program serves as a bridge to 2014, when all discrimination against pre-existing conditions will be prohibited.

To learn more about the plan for a particular state, visit the Department of Health and Human Services website.

Investment Credit for Therapeutic Discovery Projects

In 2009 and 2010, for companies with 250 or fewer employees, a 50% nonrefundable investment tax credit is allowed for expenses paid or incurred for qualified investments in qualifying therapeutic discovery projects.

Qualifying Therapeutic Discovery Project – A qualifying therapeutic discovery project is one designed to develop a product, process, or therapy to diagnose, treat, or prevent diseases and afflictions by:

(1) Conducting pre-clinical activities, clinical trials, clinical studies, and research protocols, or
(2) Developing technology or products designed to diagnose diseases and conditions, including molecular and companion drugs and diagnostics, or to further the delivery or administration of therapeutics.

Large Employer Health Coverage Excise Tax

Large employers, generally those with 50 full-time employees in the prior calendar year, that:

o Do not offer coverage for all its full-time employees,
o Offer minimum essential coverage that is unaffordable (employee contribution is more than 9.5% of the employee’s household income), or
o Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60%,
Would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy discussed previously. (Code Sec. 4980H (a))

Interaction with Premium Credit

Generally, if an employee is offered affordable minimum essential coverage under an employer-sponsored plan, he is ineligible for a premium tax credit and cost-sharing reductions for health insurance purchased through a state exchange.

However, if the coverage is unaffordable (see above) or the plan’s share of benefits is less than 60%, then he is eligible, but only if he declines to enroll in the coverage and purchases coverage through the exchange instead.

Penalty – Employer Not Offering a Health Care Plan – An applicable large employer would be liable for the penalty (figured monthly) if the employer:

1) Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and
(2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.

The excise tax penalty for any month would be $167 ($2,000/12) times the number of full-time employees in excess of 30.

Example – No Health Care Plan – In January of 2014, an applicable large employer with 120 employees does not offer a health care plan to its employees. Ten of the employees are certified as being enrolled in January in a qualified plan and three of those employees were eligible for a premium tax credit. The penalty is $167 times the number of full-time employees in excess of 30. Thus, the penalty for the month of January is $15,030 ((120-30) x $167.00). If none of the 10 employees covered by qualified plans had received the premium tax credit, the employer would not have paid any penalty.

Penalty – Employees Qualify for Premium Tax Credits or Cost-Sharing Assistance – An applicable large employer would be liable for the penalty (figured monthly) if the employer:

(1) Offers to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and
(2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee;

The excise tax penalty for any month would be $250 ($3,000/12) times the number of full-time employees that receive premium tax credit or cost-sharing reductions through an Exchange but not to exceed the penalty imposed had the employer not offered health care insurance.

Example – Health Care Plan but Employees Qualify for Premium Tax Credit or Cost Sharing Reductions – In January of 2014, an applicable large employer with 120 employees offers a health care plan to its employees, but the cost of the plan does not meet the affordable criteria (employee contribution is more than 9.5% of the employee’s household income or the plan’s share of the total allowed cost of benefits is less than 60%) and 20 of the employees sign up for the insurance through an exchange and receive Premium Tax Credit or Cost-Sharing Reductions. The employer’s excise tax penalty is $250 times 20. Thus, the penalty for the month of January is $5,000.

Penalty – Decision Tree – The flow chart below provides an overview of the large employer health care excise tax.

Applicable Large Employer – An “applicable large employer” is one that employed an average of at least 50 “full-time employees” on business days during the preceding calendar year (for an employer that wasn’t in existence throughout the preceding calendar year, the determination is based on the average number of employees reasonably expected to be employed on business days in the current calendar year). But under an exemption, an employer will not be considered to employ more than 50 full-time employees if: (a) the employer’s workforce exceeds 50 full-time employees for 120 days, or fewer, during the calendar year; and (b) the employees in excess of 50 employed during that 120-day (or fewer) period were seasonal workers, e.g., retail workers employed exclusively during the holiday season. Special rules apply to construction industry employers.

Part-Time Employees – Solely for purposes of determining whether an employer is an applicable large employer, an employer will also have to include for that month the number of full-time employees determined by dividing (a) the aggregate number of hours of service of employees who are not full-time employees for the month by (b) 120.

Example – Equivalent Full-Time Employees – For his business, John has 45 full-time employees plus he has 20 part-time employees. His part-time employees for the month of January worked 960 hours. That is the equivalent of 8 (960/120) full-time employees. Thus, the number of John’s full-time employees for the month of January is 53 (45 + 8).

Penalty Deductibility – This excise tax penalty is nondeductible under the general rules for excise taxes.

Penalty for Not Being Insured

Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage, which includes:

o Government-sponsored programs (e.g., Medicare, Medicaid, Children’s Health Insurance Program),
o Eligible employer-sponsored plans,
o Plans in the individual market, and
o Certain grandfathered group health plans and other coverage as recognized by Health and Human Services (HHS) in coordination with IRS.

The penalty will be phased in beginning in 2014 and fully implemented in 2016.

Penalty – The penalty for noncompliance is the greater of:

(A) The sum of the monthly penalty amounts for months in the taxable year during which 1 or more such failures occurred, or
(B) An amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.
Monthly Penalty Amounts – The monthly penalty amount is an amount equal to 1/12 of the greater of the following amounts:
(A) Flat dollar amount – (See computation of the flat dollar amount below)
(B) Percentage of income – An amount equal to the applicable percentage for the year (see table below) multiplied by the amount the taxpayer’s household income for the year exceeds the taxpayer’s income tax filing threshold.

Flat Dollar Amount – The flat dollar amount is the lesser of:

1. The sum of the applicable dollar amounts (see table below) for all individuals who were not covered for the month or
2. 300% of the per adult penalty (maximum $1,875 in 2016).

Percentage of Income – The percentage of income used to determine the monthly penalty is phased in for 2014 through 2016 and inflation adjusted for years after 2016. The amounts are:

Applicable Dollar Amounts (Code Sec 5000A© (3)) – The amounts are:

If an applicable individual has not attained the age of 18 as of the beginning of a month, the “applicable dollar amount” for the month will be equal to one-half of the amount shown in the table.
Household Income – Household income is the sum of the modified adjusted gross incomes (MAGIs) of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified AGI means AGI increased by all tax-exempt interest and foreign earned income.

Penalty Enforcement – For a joint return, the individual and spouse are jointly liable for any penalty payment. The penalty is not subject to the enforcement provisions of subtitle F of the Code and the use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Noncompliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner. Therefore, enforcement is generally limited to seizing a refund.

Three-Month Grace Period – No penalty is assessed for individuals who do not maintain health insurance for a period of three months or less during the tax year. If an individual exceeds the three-month maximum during the taxable year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage. IRS is to provide rules when a coverage gap includes months in multiple calendar years.
Taxpayers Exempt from the Penalty –The coverage requirement does not apply to:

Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost “bronze plan” in the local Insurance Exchange exceeds 8% of household income for the year. After 2014, the 8% exemption is increased by the amount by which premium growth exceeds income growth. If self-only coverage is affordable to an employee, but family coverage is unaffordable, the employee is subject to the penalty if he does not maintain minimum essential coverage. However, any individual eligible for employer coverage due to a relationship with an employee (e.g. spouse or child of employee) is exempt from the penalty if that individual does not maintain minimum essential coverage because family coverage is not affordable (i.e., exceeds 8% of household income).

Taxpayers with income below the income tax filing threshold (which for 2010 generally is $9,350 for a single person or a married person filing separately and is $18,700 for married filing jointly).

Those exempted for religious reasons (who must be members of a recognized religious sect exempting them from self-employment taxes).

Individuals residing outside of the U.S. (who are deemed to maintain minimum essential coverage).

Individuals who are incarcerated or are not legally present in the U.S.
All members of Indian tribes.

Example – Monthly Penalty Amount – For the example, assume the following: Married taxpayers under the age of 65 who were not insured for five months during 2016. Their AGI for the year was $50,000 and they had $500 in tax-exempt interest income. For this example, use the 2010 income filing threshold, which for a married couple is $18,700 ($11,400 + $3,600 + $3,600). The penalty is determined as follows:

Flat Dollar Amount is the lesser of (1) the sum of the applicable dollar amounts for all individuals not insured (per person penalty) or (2) 300% of the dollar amount for the year (per family penalty). (1) = ($625 × 2) = $1,250 (the lesser amount)

(2) = 300% x $625 = $1,875 Percentage Income Amount is the applicable percentage for the year times the taxpayer’s income in excess of the income tax filing threshold for the taxpayer determined as follows: Taxpayer’s income = AGI plus tax-exempt income = $50,000 + $500 = $50,500 Percentage Amount = ($50,500 – $18,700) x 2.5% = $795

Thus, the taxpayer’s monthly penalty amount is 1/12 of the greater of the flat dollar amount ($1,250) or the percentage of income amount ($795). Thus, the taxpayer’s monthly penalty amount is: $104.17 ($1,250/12). Thus, the taxpayer will be subject to a penalty of the greater of $520.85 ($104.17 × 5 months) or an amount based on the national average premium for qualified health plans which have a bronze level of coverage.

Premium Assistance Credit

Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”.

“Exchange”
The Health Care Act requires each state to establish an “American Health Benefit Exchange” (“Exchange”) by Jan. 1, 2014, and requires insurers to provide QHPs to be sold on these Exchanges. The Premium Assistance Credit applies to QHPs purchased on an Exchange.

Applicable Taxpayers – Generally, these are individuals whose household income is at least 100%, but not more than 400% of the federal poverty line and who don’t receive health insurance under an employer plan, Medicaid or other acceptable coverage. Based upon the current poverty levels, the credit would phase-out at $42,420 for individuals and $88,200 for a family of four.

Enrollment – Eligible individuals will enroll in a plan offered through an Exchange and report his or her income to the Exchange. Based on the information provided to the Exchange, the individual will receive a premium assistance credit based on income.

Credit Paid Directly to Insurance Plan – IRS will pay the premium assistance credit amount directly to the insurance plan in which the individual is enrolled, and the individual will pay the difference between the premium and the credit. For employed individuals who purchase health insurance through a state Exchange, the premium payments will be made through payroll deductions.
Failure to Pay the Difference – Individuals who fail to pay all or part of the remaining premium amount will be given a mandatory three-month grace period before an involuntary termination of their participation in the plan.

Eligibility – Eligibility for the premium assistance credit will be based on the individual’s income for the tax year ending two years before the enrollment period. (Committee Report) The Secretary of Health and Human Services (HHS Secretary) must establish procedures for determining whether an individual who is applying for coverage in the individual market by a QHP offered through an Exchange, or who is claiming a premium assistance credit or reduced cost-sharing, meets the necessary eligibility requirements.

Amount of Premium Assistance Credit – The credit is based on the taxpayer’s household income level relative to the federal poverty line. The calculation is computed on a sliding scale starting at 2.0% of income for taxpayers at or above 100% of the poverty line and phasing out to 9.5% of income for those at 400% of the poverty line. The reference premium will be the second lowest cost silver plan available in the individual market in the rating area in which the taxpayer resides.

Deductibles & Co-payments – The standard out-of-pocket maximum limits will be reduced by:
Two-thirds for individuals with household incomes of more than 100% but not more than 200% of the poverty line,
One-half for individuals between 201% and 300% of the poverty line, and
One-third for individuals between 301% and 400% of the poverty line. The cost-sharing subsidy is available only for those months in which an individual receives the Premium Assistance Credit.

Student Loan Forgiveness for Health Professionals

Previously, an individual’s gross income didn’t include cancellation of debt income that was attributable to the discharge of all or part of any student loan if the discharge was made under a provision of the loan – that all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

New Law: The law has been amended to include amounts received by an individual in tax years beginning after Dec. 31, 2008; the gross income exclusion for amounts received under the National Health Service Corps loan repayment program or certain State loan repayment programs is modified to include any amount received by an individual under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas as determined by the State.

Tax Credits for Small Employers Offering Health Coverage

The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. The term “nonelective contribution” means an employer contribution other than an employer contribution pursuant to a salary reduction arrangement.
o 2010 through 2013 – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000 will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for its employees. (Note, however, that the phase-out of the credit operates in such a way that an employer with exactly 25 full-time equivalent employees or with average annual wages exactly equal to $50,000 is not eligible for the credit. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000.
o 2014 and Later – In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

An eligible small employer generally is an employer with no more than 25 full-time equivalent employees employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.

The credit percentage that can be claimed varies with the number of employees and average wages. The full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages (AAEW) from the employer of less than $25,000.

Calculating the credit amount – The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage (shown in the table below) and subject to the phase-outs discussed later:

(1) The amount of contributions the eligible small employer made on behalf of the employees during the tax year for the qualifying health coverage.
(2) The amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. Contributions under this method are determined by multiplying the benchmark premium by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer. (See table below)

*For years after 2013, only available for a maximum coverage period of two consecutive tax years
Computing the Credit Phase-Out – The full credit is only available to eligible small employers with 10 or less full-time equivalent employees with an average annual full-time equivalent wage (AAEW) of $25,000 or less. If either or both of these thresholds are exceeded, then the credit is reduced.

There is no credit reduction if there are 10 or less full-time equivalent employees FTEs with an AAEW of $25,000 or less.

There is no credit if the full-time equivalent employees exceed 25 or the AAEW exceeds $50,000.

To figure the reduction of credit when the limits are exceeded, the number of the employer’s full-time equivalent employees and average annual full-time equivalent wages (AAEW) for the year must be determined.

Figuring the number of full-time equivalent employees – An employer’s full-time equivalent employees (FTEs) is determined by dividing the total hours the employer pays wages during the year (but not more than 2,080 hours per employee) by 2,080. The result, if not a whole number, is then rounded down to the next lowest whole number if any.

Calculating average annual wages (AAEW) – Average annual equivalent wages is determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer’s full-time equivalent employees for the year (rounded down to the nearest $1,000 if need be).

Credit reduction – If the number of full-time equivalent employees exceeds 10 or if AAEW exceed $25,000, the amount of the credit is reduced (but not below zero). Both reductions can apply at the same time!

Example – Joe owns a small California wood working business and has 12 employees, not counting himself or family members. The total FICA wages (without regard for wage base limitations) for the year were $297,500 and total hours worked by his employees during the year were 24,400. None of his employees worked more than 2,080 hours during the year. Joe made nonelective contributions to purchase health insurance for his employees in the amount of $49,800 for the year. Joe’s credit is determined as follows:

• Small Business Benchmark Premium (from Table Below) = 12 × 4,628 = $55,536
• Smaller of actual premium paid or Benchmark premium = $49,800
• Tentative credit = $49,800 × 0.35 = $17,430
• Full-time equivalent employees (FTEs) = 24,400/2080= 11.7 rounded down = 11
• Average annual full-time equivalent wages (AAEW) = $297,500/11 = $27,045 rounded down = $27,000
• FTE Reduction = ((11-10)/15) x $17,430 = $1,162
• AAEW Reduction = ((27,000-25,000)/25,000) x $17,430 = $1,394
• Joe’s health insurance tax credit = $17,430 – $1,162- $1,394 = $14,874

Other Issues:

o The credit reduces the employer’s deduction for employee health insurance.
o Aggregation rules apply in determining the employer.
o Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for purposes of this credit.
o The credit is not available for a domestic employee of a sole proprietor of a business, and there’s a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members.
o The credit is a general business credit and can be carried back one year and forward for 20 years. However, because an unused credit amount cannot be carried back to a year before the effective date of the credit, any unused credit amounts for taxable years beginning in 2010 can only be carried forward.
o The credit is available for tax liability under the alternative minimum tax.
o The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is generally health insurance coverage purchased from an insurance company licensed under State law.
o For tax years beginning in years after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a State exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.

Please call this office if you have questions related to Tax Credits for Small Employers Offering Health Coverage.

Taxation Solutions, Inc.

12250 Queenston Blvd Suite H, Houston, TX 77095