Affordable Care Act Sees More Employers Embracing Credits: Taxes

Boutique accounting, medical and legal firms that resisted offering insurance to their employees under the new health-care law may change their minds when the tax advantages go up next year.

Companies with 10 full-time employees or fewer, making an average wage of $25,000 or less, may get a 50 percent tax credit for the amount of their contribution to cover premiums in 2014, Bloomberg BNA reported. Nonprofit employers can get 35 percent, the Internal Revenue Service said in its proposed rules.

The Obama administration is courting companies, trying to make the Affordable Care Act a success amid a partisan clash that has continued for three years since the law passed. The president is seeking to expand insurance coverage to at least 30 million uninsured Americans, and small businesses have resisted the idea of offering coverage, saying it is too expensive.

Before the rate increase, the credit was small, said Brian Haile, senior vice president for health policy with Jackson Hewitt Tax Service Inc. In 2013, the maximum rate was 35 percent to for-profit employers and 20 percent for nonprofits.

“Expanding it from 35 to 50 percent is very helpful,” Haile said.

The credit decreases as employers enter a “phase-out” range of between 10 and 25 employees, or pay average wages between $25,000 and $50,000. Employers in the range often weren’t able to claim much of a tax credit, he said.

“The increase in the percentage that they can claim changes some of that dynamic,” Haile said.

In Between

Employers that otherwise would be considered small businesses under the rules -- because they have fewer than 50 full-time workers -- may find themselves at a disadvantage now, compared with smaller firms that have less than 25 people, said Matt Kelley, manager of indirect tax practice with accounting firm EY.

“It does create an ‘in-between’ state for a lot of employers of that size,” he said.

Small employers in this situation want the IRS to close this gap in its final rules and make the credit more widely available as an incentive to provide health care, said Kelley whose work focuses on helping franchise businesses understand the implications of the health care laws.

One of the primary areas small employers struggle with is the calculation of the credit, Kelley said.

“It’s not as simple for them as someone with a tax or accounting department,” he said. “Unless they’re a small law firm or accounting firm, they won’t have their own lawyer or accountant on hand to help them go through the credit.”

Family Businesses

Calculating whether their organization is eligible for a credit, as well as how many workers they have and the average employee salary in order to calculate the value of the credit available to them -- which requires additional calculation if the employer falls into the phase-out range -- combine to create complexities that small businesses usually aren’t able to deal with, Kelley said.

Not all the people are considered when calculating the number of workers or the average wages. Some like contractors, partners and most family members and their dependents are left out, according to the proposed rules.

Businesses with one or a few highly paid owners and with generally low-wage employees are “a fantastic candidate for this credit,” he said.

The key part to obtain the credit is for those owners to fall into one of the categories of excluded individual, so that they do not count toward the average wage cap, Haile said.

“For an awful lot of small businesses that are family owned and family run, it really doesn’t help,” because of the exclusion of owners and family members, said Timothy Jost, law professor at Washington and Lee University School of Law in Lexington, Virginia.

Phasing Out

The credits phase out after two years, so some employers may only provide employee health coverage when the credit is available and stop when the tax incentive ends.

“These are the employers most likely to drop coverage,” because the profit margins for small employers can be so thin, Haile said. Once the credit expires and the expense of providing coverage goes up, small employers face no penalty for dropping the credit, he said.

“If the only reason you’re offering health insurance is because you’ve got a 50 percent tax credit, I would not be surprised if you drop it after two years,” Jost told BNA.

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