Does Your Business Qualify for the Health Care Tax Credit?

Health Care Tax Credit

The landmark health care legislation, enacted in March of 2010, continues to stir emotion on both sides of the isle. Regardless of which side of the argument you are on, the fact is, legislation impacting small and medium business, including the family farm, has been passed and is in effect for 2010 and 2011.

Before addressing my subject, which is the business tax credits included in the health care legislation, let me share with you my background to provide perspective on my point of view. Many of you may not know it, but in addition to being a CPA and owner of Hauk Kruse & Associates, I have degrees in both Agricultural Economics and Animal Science and the larger part of my life was spent farming the family farm in Northern Missouri. Now, as a business owner I bring the intense ownership spirit from my life as a farmer with me as an advocate for all of my clients.

It is in that spirit that I would like to address the cost/benefit of the health care legislation as enacted.

So, who qualifies for the tax credits? Not every business will qualify for the health care tax credit, but in general you will qualify if:
- You have 25 or fewer full-time equivalent employees;
- Average annual wages per employee (excluding owners and their families) is less than $50,000; and,
- You pay at least half of the employee portion of health insurance.

The third bullet point clearly defines the purpose of the tax credit and that is to get business owners in the habit of paying for an increasing share of the total health insurance bill for the average working family. Many businesses today will pay a portion of the employee coverage, but few pay up to 50% of the employee coverage. If you are one of the employers paying less than 50% of the employee coverage, before you stop reading, stay a while longer so we can do some number crunching together to help clarify what is being offered in the tax credit.

Health care costs have been rising significantly for several years. These drastic increases in the cost of health insurance may be the single greatest factor in determining how much of an employee's health insurance an employer is willing or able to cover. However, these insurance increases have also led to new health insurance planning opportunities, health savings accounts, higher deductibles, and health reimbursement accounts. Let's make a few assumptions and re-address the health care tax credit as an opportunity. Assume:
- An employer's contribution to the baseline employee health insurance cost is 25% of their single coverage;
- An employee has health insurance and is paying for it either through their earnings or with after tax dollars;
- An employee uses their wage to pay for their health insurance either on a pre-tax (employer contribution) or an after tax basis;
- The employee will still want insurance even if the employer does not pay for it;
- Form's 1099: Please make sure that you have filed Form's 1099 for all contractors or service vendors who you have paid in excess of $600.
- Average employee individual coverage is $300 per month per employee and $10,000 annually for a family of four coverage with maternity;
- Assume further that the spouse is of child bearing age;
- Employee salary of $35,000 per year does not include the employer coverage of 25% of the employee individual health coverage per month.

Rather than eliminate our small business from the tax credit opportunity because of our participation in health insurance coverage, let's start at the beginning with the pool of money we've allocated to compensate the employee for their efforts. With that pool as a backdrop, let them make an annual election as to how much of what they are paid should be allocated to their health insurance and how much they receive directly.

Using the assumption above, the payroll pool for this employee is $35,900. That pool includes the employee's annual salary plus the employers 25% of their health coverage amounting to $900.
An employee allocation election to designate more of their salary to health insurance saves the employee FICA taxes, federal withholding, and state withholding on that portion of their payroll pool that they allocate to health insurance. Even though the taxable wage for the employee is now lower (the employer contribution to health insurance is pre-tax) this leaves the employee with a greater after tax spending power. This change also more than likely makes the employer now eligible for the health insurance tax credit.

Each year the pool is recomputed based upon the original plan's employer contribution commitment of 25% of employee health costs. This method continues to allow the employer to defray the cost of increases in insurance, but gives the employee flexibility in how they allocate their payroll pool.
This new thought process more than likely requires a change in the current employer/employee relationship as follows:
- Annual enrollment by the employee to determine their payroll pool allocation;
- Change in the overall employee benefit plan;
- Change in the health insurance coverage plan;
- Change in the employee employment contracts (this might require an employment contract).
Your health insurance carrier or broker would also be involved to ensure the company plan is still operating as designed.

While I was working the farm, my dad would say that with opportunity comes responsibility. That saying holds true here, implementation is not without additional steps and management by the ownership group. However, the opportunity does exist. Let me know if you can use our help in evaluating, implementing, communicating, or documenting such a plan for your farm or business.

All my best,

Bill

R. William Kruse III

"Truth will ultimately prevail where there is pains to bring it to light" George Washington

Hauk Kruse and Associates, LLC
721 Emerson Road, Suite 120
St. Louis, MO 63141
(314) 993.4285