How is the Health Care Tax Credit Calculated ?

Morning Fun People !

Hmmm.. well its not easy to follow this as they wrote it in standard legalese which means it takes hours to decipher what they are trying to say.

HOWEVER, here it is and Ill add some examples to make it easier for everyone.  

Again, a HUGE thanks to my close friend, Attorney Albert Lee from Tucker/Arensberg from the Pittsburgh Office.

Ready… ok lets rock.

How is the Tax Credit Calculated?

Only premiums paid by the employer under an arrangement meeting certain requirements ( a “qualifying arrangement” ) are counted in calculating the credit.  Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in the amount equal to a uniform percentage (no less than 50 percent) of the premium cost of the coverage.

If and employer pays only a portion of the premiums for the coverage provided to employees under arrangement (with employees paying the rest) the amount of premiums counted in calculating the credit is only the portion paid by the employer.

The employer MUST pay a minimum of 50% of the premiums in order to receive the tax credit.

Lets say the employer pays 80 percent of the premiums for the employee’s coverage (with the employee paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the tax credit.

For purposes of the credit (including the 50 percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.

HOW TO CALCULATE THE TAX CREDIT FOR SMALL BUSINESSES WITH 10 OR FEWER FULL-TIME EMPLOYEES AND ANNUAL AVERAGE WAGES LESS THAN $25,000

EXAMPLE:

1)     The Employer is an Auto Repair Shop with 10 FTEs

2)     The employer pays total wages of $200,000 or $20,000 per worker

3)     The employer’s Health Care costs come to $70,000, which is 50% more of the total premium costs

4)     2010 Tax Credit = $70,000 X 35% = $24,500

5)     2014 Tax Credit = $70,000 X 50% = $35,000

HOW TO CALCULATE THE TAX CREDIT FOR SMALL BUSINESSES MORE THAN 10 BUT LESS THAN 25  FTEs AND ANNUAL AVERAGE WAGES LESS THAN $50,000 PER FTE.

EXAMPLE:

1)     The Employer is a restaurant with 24 Part-Time Employees

2)     The full-time equivalent of 24 part-time employees = 12 Full time Employees

3)     The employer pays total wages of $360.000 or $30,000 per full-time worker

4)     The employer’s healthcare costs are $96,000 which is 70% or more of the total premium costs. (This is called a qualifying arrangement.)

5)     STEP 1: An eligible employer’s maximum credit percentage is 35%  ($96,000 X 35% = $33,600)

6)     STEP 2: Credit reduction for FTE’s in excess of 10  ( $33,600 X 2/15 = $4,480

7)     STEP 3: Credit Reduction for average annual wages in excess of $25,000 of $30,000 minus $25,000 = $5,000  ($33,600 X ($5,000 / $25,000)     $33,600 X .2 = $6,720

8)     STEP 4: Total credit reduction = $4,480 + $6,720 = $11,2000

9)     STEP 5: $33,600 - $11,200 = 22,400

10)   2010 Tax Credit = $22,400 (35% tax credit)

11)   2014 Tax Credit = $36,800 (50% tax credit)

EMPLOYERS WITH A FULL-TIME EQUIVELENT OF 25 OR MORE EMPLOYEES ARE INELIGIBLE FOR THE TAX CREDIT

Well I hope this helps… I know it’s a bit confusing but then again it’s a government.

Tomorrow…   WHATS COMING IN 2011 !!

Have a Great Day and a Profitable Week and be sure to check out the Family Business Chamber of Commerce at www.familybusinesscc.com

Rich