Magazine article The CPA Journal

Helping Small Businesses Provide Healthcare Coverage

Magazine article The CPA Journal

Helping Small Businesses Provide Healthcare Coverage

Article excerpt

According to the Office of Advocacy at the U.S. Small Business Administration, the cost of health insurance has been a top concern of small businesses for many years. A study conducted by the Kaiser Family Foundation and the Health Research & Educational Trust (HRET) in 2009 determined that the average annual premiums for employersponsored health insurance were $4,824 for single coverage and $13,375 for family coverage ("Employer Health Benefits, 2009 Summary of Findings," pdf/2009/7937.pdf). Those costs were expected to increase by at least 9% in 2010 (PricewaterhouseCoopers' Health Research Institute, "Behind the Numbers: Medical Cost Trends for 2010," us/en/healthcare/publications/behind-thenumbers-medical-cost-trends-for-20 1 0.jhtml). The Kaiser/HRET report also found that, on average, 60% of employers offered health insurance benefits in 2009, although only 46% of firms with three to nine employees and 72% of companies with 10 to 24 employees offered coverage.

The high cost of health insurance and the shortfall in coverage by small employers is a special concern because the Office of Advocacy also notes that small businesses employed over half of all private-sector employees between 1993 and 2008 and created 64% of the net new jobs in that same period. The problems for uninsured taxpayers will get worse because the new Patient Protection and Affordable Care Act (PPACA) mandates that, starting in 2014, all U.S. citizens and residents, other than those under incarceration and those exempted for religious reasons, must ensure that they have at least minimum health care coverage. Individuals without coverage for themselves and their dependents will be levied a penalty for each month they fail to have coverage.

A provision in the PPACA (section 1421 [a], PL 111-148, 3/23/2010) is intended to help small businesses that employ low- to moderate-income employees provide health insurance. Beginning in 2010, eligible small employers are allowed a credit under code section 45R of 35% of certain health insurance coverage expenditures for employees. Eligible small taxexempt employers can qualify for a 25% credit. The credit for both types of employers will increase to 50% and 35%, respectively, beginning in 2014, although additional requirements will have to be met starting that year.

Calculation of the Credit for 2010 through 2013

For tax years beginning in 2010 through 2013, the tax credit that can be claimed by small employers, subject to phase-out, is equal to 35% of the lesser of -

* the amount of contributions paid by the employer on behalf of its employees during the tax year for qualified health plan coverage; or

* the average premiums the employer would have paid for the same type of coverage in a small group market in the state. For 2010 through 2013, the average premium for a small group market plan will be determined by the Secretary of Health & Human Services (HHS) for states and areas within states if those areas have considerably higher healthcare premiums (code section 45R[b]).

For example, assume that the owner of a dry cleaning business employs four workers and pays $16,000 for health insurance for them. The credit for 2010 would be the lesser of $5,600 (0.35 ? $16,000) or 35% of what the premiums for the four employees would have been as determined by HHS for the state in which the business is located.

The premiums paid during all of 2010, not just those paid after the act was passed, are considered in calculating the credit (notice 2010-44, section ? F, 2010-22 IRB 717).

Only the portion of premiums paid by the employer, not amounts paid by employees, is included in calculating the credit. The employer contributions cannot be the result of salary reduction agreements in which the employees elect to reduce their compensation and have those amounts made as employer contributions on the employees' behalf (proposed regulation section 1. …

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