For many sign businesses, offering health insurance is critical to attracting the kind of workers they need to succeed. Fortunately, whether the business presently offers health insurance or is merely considering offering it, there is a sliver of silver lining in the form of a unique, often-overlooked tax credit for small employers.
Created as part of the Affordable Care Act, the Small Employer Health Insurance Tax Credit is already benefiting businesses with 25 or fewer employees. In fact, the Internal Revenue Service is encouraging all small businesses to explore and, if qualified, claim this unique health insurance coverage tax credit.
Statistics from 2011 reveal that two out of five businesses in the nation will qualify for these tax credits. This could affect 19.3 million employees and possibly provide $15.4 billion in tax credits to small businesses.
The Small Employer Credit
A sign business that provides health care coverage is eligible for the Small Employer Health Insurance Tax Credit if, for the tax year, they have 25 or fewer full-time equivalent (FTE) employees who are paid an average annual salary of less than $50,000. The tax credits are higher the lower the average salary and the fewer FTEs the sign shop or business has. The maximum credit is 35% this year and rises to 50% of the annual premium paid for 2014 and thereafter.
Unfortunately, the full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees (FTEs) and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.
While any qualifying sign business is eligible to receive the Small Business Health Care Tax Credit, it works on a sliding scale and is specifically targeted for those businesses with low- and moderate-income workers. Bottom line, the tax credit is highest for sign businesses that have fewer than 10 employees who are paid an average of $25,000 or less. In other words, the smaller the business, the bigger the credit.
To qualify for tax credits, the employer must also contribute at least 50 percent toward the employee's premium cost. Owner's salaries and owner's family's salaries are not counted in determining the average salary.
New IRS Rules
The IRS recently proposed guidelines for the small employer tax credit created by the Affordable Care Act. Among other things, the Guidelines address the eligibility requirements for employers to claim the credit, provide guidance on how to calculate and claim the credit, and explain the effect on estimated tax, alternative minimum tax and, of course, tax deductions.
Under the Guidelines, in order to take advantage of this tax credit, small employers (those with 25 or fewer full-time equivalent employees) must have in place a contribution arrangement through which the sign business can make a non-elective contribution on behalf of each employee who enrolls in a qualified health plan (QHP) offered by the employer.
The contribution amount must be at least 50 percent of the QHP's premium cost. In addition, the average annual wages of the employer's FTEs cannot currently exceed $50,000. Through 2013, the maximum credit is 35 percent of premiums paid by small business employers. For tax years beginning in 2014 or later, the maximum credit will increase to 50 percent of premiums paid by sign business/employers.
And, as mentioned, the IRS has said certain higher-income individuals, specifically sole proprietors, partners in partnerships, or shareholders owning more than 2 percent of the stock in an S corporation, and any owners of more than 5 percent of other businesses, do not have to be counted as employees when calculating the average wage.
Although the tax law does not specifically refer to spouses, the IRS says that spouses are nevertheless excluded from the definition of employee for those purposes.
The IRS's proposed guidelines also contain transition rules if an eligible small employer's plan year begins on a date other than the first day of its taxable year. Since about 30 percent of employers in the small group market don't have plans that run on a calendar year, the new rules mean premiums paid by the sign business under their old plans as well as what they are paying when they switch to the exchange will be eligible for the tax credit.
What's more all qualifying sign businesses are eligible to buy health insurance on a special exchange known as Small Business Health Options Program (SHOP).
Marketplaces, Exchanges And SHOP
One of the key features of the Affordable Care Act was the creation of Health Insurance Exchanges, or Marketplaces, for the sale of health insurance. For employers with less than 50 employees, private exchanges will compete with the public Small Business Health Option Program (SHOP) exchanges each state is required to have.
Small employers that want to make health insurance coverage available to their employees can choose to offer those employees coverage from the SHOP. Should a small employer decide to offer this type of coverage, it has the ability to select which plans to make available to its employees — and it is not required to offer all coverages sold through the SHOP to its employees. However, if a small employer determines that SHOP plans will be made available to its employees, then all full-time employees must be offered this coverage.
Open enrollment for SHOP coverage was scheduled to begin on October 1, 2013, and coverage will become effective January 1, 2014. Commencing in 2016, the SHOP will be open for employers with up to 100 full-time equivalent employees.
The Changes, They Are Coming
Every sign professional will see a number of important changes to the tax credit for tax years beginning in 2014 and forward. As mentioned, the credit amount increases to 50% of premiums paid by eligible small employers. Cost-of-living adjustments are made to the average annual wage phaseout amounts. (The credit is phased out gradually when average annual wages exceed certain amounts.)
Another difference involves the two-year limit on claiming the credit. Before 2014, there was no time limit on taking the credit; qualifying employers could have taken it in 2010, 2011, 2012, and 2013. Beginning in 2014, there is a two-year limit, which begins with the first year the employer files Form 8941, Credit for Small Employer Health Insurance Premiums. However, employers that took the credit before 2014 can take the credit for two more years in 2014 and later.
Not too surprisingly, employers providing health care benefits also face administrative reporting requirements under the ACA. In general, the sign business must use the IRS's Form 8941 to calculate the credit. Most small businesses will include the amount as part of the general business credit on their annual income tax return. Plus, as a small business employer, the sign business may be able to carry the credit back or forward.
According to the Government Accountability Office (GAO), Congress's investigative arm, fewer small employers claimed the Small Employer Health Insurance Tax Credit in tax year 2010 than were estimated to be eligible. While 170,300 small employers claimed it, estimates of the eligible pool by government agencies and small business advocacy groups ranged from 1.4 million to 4 million. The cost of credits claimed was $468 million.
Among the factors reportedly limiting the credit's use is that most very small employers, 83 percent by one estimate, do not offer health insurance. According to many experts the credit is not large enough to incentivize employers to begin offering insurance. Complex rules on FTEs and average wages are also apparently limiting use. In addition, tax preparer groups the GAO met with generally said the time needed to calculate the credit deterred claims.
As the tax filing deadline approaches for many sign professionals, owners, and shop managers are looking for ways to reduce the sign operation's tax bills. Although the ACA does not require that a small shop or business provide health insurance, it does offer tax credits for eligible small businesses that choose to provide insurance to their employees for the first time, or maintain the coverage they already have.
The ugly truth is that one in four small business owners in the U.S. are uninsured. Thanks to the ACA they can now afford their own health insurance. In fact, the ACA will allow 83 percent of currently uninsured small business owners to become eligible for healthcare coverage. Additionally, many small business owners who currently buy their own individual healthcare coverage in the private market may be eligible to take advantage of new cost savings as well.
Finally, for a sign professional or business that was eligible for the tax credit for the 2013 tax year, but that forgot to claim it on the annual tax return, there's still time to file an amended return. Naturally, in order to fully understand all of the pros and cons of the Small Employer Health Insurance Tax Credit, professional assistance is strongly recommended.