Health Care Reform
How Healthcare reform will affect Small Companies
The results of healthcare reform will be widely felt by small business with slim margins, and high rates of uninsureds. The many taxes, and other legislated changes will drive up insurance rates for most, making it even less affordable. The increase will vary from state to state, and the age and health of your employees will pay a factor. There is, however a small tax credit which is available immediately, meant to partially offset the increased costs. The tax credit is available to most employers with fewer than 25 full time equivalent (FTE) employees, if the average wages are less than $50,000 per FTE per year. One FTE, is one person working 40 hours a week. Two people each working 20 hours per week is also considered 1 FTE. The tax credit increases if the average earnings are less than $25,000, and if there are 10 or fewer FTE’s.In order to qualify, the employer must pay at least 50% of the premiums. In order to calculate the number of FTE’s, do not add the owners, or family. In order to determine the average salaries, also exclude the earnings of the owner and family. The tax credit is up to 35 % depending on your number of employees, and their average earnings. The tax credit is a percentage of the employer’s contribution towards premium, not a percentage of the total premium. The maximum tax credit can be no more than the Medicare tax contributions.
The following is an illustration of the tax credit for a towing company with 10 FTE’s which pays one half of the health premiums:
Number of FTE’s excluding owner: 10
Total annual wages excluding owner: $250,000
Total monthly health insurance premium: $4,000
Employer contribution towards premium: 50% or, $2,000
Maximum tax credit: $700
The following is an illustration of the tax credit for a towing company with 10 FTE’s which pays all of the health premium:
Number of FTE’s excluding owner: 10
Total annual wages excluding owner: $250,000
Total monthly health insurance premium: $4,000
Employer contribution towards premium: 100% or, $4,000
Maximum tax credit: $1,400
At the time of the writing of this article, the details are still very scetchy, and are changing every day. The tax credit may be claimed on your company’s 2011 tax return, and will likely be a complicated formula.
What kinds of things mean a greater tax credit?
1) Lower average wages paid. The credit is gradually phased out as average wages reach $50,000, so by outsourcing higher paid tasks, you can keep your average wage down
2) Pay more of the premium, since the credit is applied to employer portion. It is more cost effective to pay lower wages, and greater portion of premiums.
3) Number of employees below 25 FTE’s. There is no credit for companies with more than 25 FTE’s. Can some functions be outsourced to keep your numbers under 25?
4) All fully insured state regulated plans will be affected. Participating in a partially self funded plan, where your premiums are based on your usage will not be affected as badly.
These tax credits start this tax year, and so will the first round of increases to health insurance, so don’t leave this tax credit on the table. Starting 2011, you will need to report employee premiums on their W-2 forms.