William E. Hardy, CPAPrincipalHarris, Hardy & Johnstone, PCbhardy@hhjcpa.com34 Years Experience

George G. Crowell, CPA, CITPPrincipalHarris, Hardy & Johnstone, PCgcrowell@hhjcpa.com20 Years Experience

www.hhjcpa.com

SMALL EMPLOYER HEALTH INSURANCE CREDIT

Do I Qualify for the Health Care Credit? Am I an Eligible Small Employer?

It depends Do you have less than 25 FTEs? Are the average wages of your employees less than $50,000? If you meet the above criteria, then YES.

Are there any other requirements? Generally must pay at least 50% of the Premium. In 2010 – 2013, Health Insurance provided through a Qualifying

Arrangement Beginning in 2014, Health Insurance must be bought through a

SHOP.

SMALL EMPLOYER HEALTH INSURANCE CREDIT

How does the credit work? You receive a credit for a percentage of the EMPLOYER

premiums paid. In 2010 – 2013, up to 35% for ESEs and 25% for Tax-exempt

Employers. Beginning in 2014, up to 50% for ESEs and 35% for Tax-exempt

Employers For ESEs, credit is limited to regular income tax and AMT, can be

carried back or forward For Tax-exempt Employers, credit is refundable (must file 990-T)

Phase-outs If you have between 10 and 25 employees, the credit is reduced. If your average wages are between $25,000 and $50,000, the credit

is reduced. Credit reductions are combined if both situations apply.

SMALL EMPLOYER HEALTH INSURANCE CREDIT

How does the credit work? What is an FTE or Full-Time Equivalent?

For every 2,080 employee hours working in a year you have one FTE.

If you have two employees, each who work 20 hours per week for the entire year, you have one FTE.

The following are not counted in the FTE calculation: Owner of sole proprietorship Partner in a partnership > 2% shareholder in a S-Corporation > 5% shareholder in a C-Corporation Person who owns more than 5% of capital or profits in any other non-

corporate business Any family member or non-family member dependents of those above Seasonal employees who work less than 120 days

SMALL EMPLOYER HEALTH INSURANCE CREDIT

How does the credit work? What if I did not the claim credit in prior years, but I

qualified? You can amend any open years to claim the credit If amending a pass-through entity (Partnership or S-Corp), the

shareholders will also have to amend their returns The following are not counted in the FTE calculation:

Owner of sole proprietorship Partner in a partnership > 2% shareholder in a S-Corporation > 5% shareholder in a C-Corporation Person who owns more than 5% of capital or profits in any other non-

corporate business Any family member or non-family member dependents of those above Seasonal employees who work less than 120 days

SMALL EMPLOYER HEALTH INSURANCE CREDITTax Years 2010-2013

ESEs

SMALL EMPLOYER HEALTH INSURANCE CREDITTax Years 2010-2013

Tax-exemptEmployers

SMALL EMPLOYER HEALTH INSURANCE CREDIT2014 and Beyond

ESEs

SMALL EMPLOYER HEALTH INSURANCE CREDIT2014 and Beyond

Tax-exemptEmployers

25 to 49 Employees

Am I subject to penalties? No, as long as your FTE count does not exceed 49 May face penalties if you discriminate in your health

insurance coverage, starting in 2015

Can purchase insurance from SHOPs, Small Business Options Program

25 to 49 Employees

Need to be especially careful as you approach 40 employees

Should track hours for each employee to make sure you do not reach or pass 50 FTEs

Will need to be more aware of whether independent contractors could qualify as employees

Make sure you include all related businesses in your FTE count

Will probably face higher premiums if you provide insurance for your employees

50 or more Employees – The Penalty ZoneTwo potential penalties (Beginning in 2015):

§4980H(a) Penalty for not offering Minimum Essential Coverage Employer does not offer affordable minimum essential coverage to

at least 95% of its full-time employees (including dependents starting 2015) and at least one employee qualifies for the Premium Assistance Credit

§4980H(b) Penalty for not offering affordable Minimum Essential Coverage that provides minimum value Employer does provide coverage to at least 95% of its full-time

employees (including dependents starting in 2015), but the coverage is either unaffordable or does not provide minimum value

50 or more Employees – The Penalty Zone§4980H(a) Penalty for not offering Minimum Essential Coverage

$2,000 for each full-time employee, over the 30 employee threshold

The penalty is calculated and paid on a monthly basis($2,000 ÷ 12 Months = $166.67 per month)

50 or more Employees – The Penalty Zone§4980H(a) Penalty for not offering Minimum Essential Coverage - Example

In 2015, Able Automotive has 60 employees, who each work 40 hours a week (i.e., are full-time employees) every week in the year. Therefore, Able is an applicable large employer. Assume all employees have worked for Able for more than one year and were determined to be ongoing full-time employees who must be offered health insurance coverage for the 2015 calendar year. Able does not offer minimum essential health insurance coverage for the employees in the months January-March. Beginning in April, Able offers affordable minimum essential coverage for all full-time employees and their dependents. Ten full-time employees are certified to Able as having enrolled in a QHP in the individual market through the state insurance marketplace and received the premium assistance credit for January-March.

Able's penalty for not offering minimum essential coverage for the first quarter of 2015 is $15,000.30 [(60 full-time employees - 30 full-time employee threshold) × 3 months × $166.67 per month].

50 or more Employees – The Penalty Zone§4980H(a) Penalty for not offering Minimum Essential Coverage - Example

NOTE: Although only 10 full-time employees received the premium assistance tax credit, Able’s penalty is based on 30 employees(60 full-time employees – 30 full-time employee threshold)

50 or more Employees – The Penalty Zone§4980H(b) Penalty for not offering affordable Minimum Essential Coverage that provides Minimum Value

$3,000 annually per employee, and will be adjusted for inflation beginning in 2015($250 per month x 12 months = $3,000)

Employer is subject to the penalty for each employee for whom the employer has received notification that the employee enrolled in a Qualified Health Plan (QHP) in the individual market through a state insurance marketplace for which a premium assistance credit or cost-sharing-reduction subsidy was allowed or paid to the employee

50 or more Employees – The Penalty Zone§4980H(b) Penalty for not offering affordable Minimum Essential Coverage that provides Minimum Value

The total §4980H(b) penalty cannot exceed the penalty that would be calculated under §4980H(a)

50 or more Employees – The Penalty Zone§4980H(b) Penalty for not offering affordable Minimum Essential Coverage that provides Minimum Value - Example

In 2015, Able Automotive (an applicable large employer) offers minimum essential coverage to its 60 full-time employees and their dependents. However, Able's coverage is not affordable. The state insurance marketplace notified Able that 25 full-time employees were paid a premium assistance credit to purchase insurance in a QHP in the individual market through the marketplace for the entire year.

Able's penalty for offering unaffordable coverage for 2015 is $75,000 (25 full-time employees × 12 months × $250 per month). However, the penalty is capped at $60,001.20 [(60 full-time employees - 30-employee threshold) × 12 months × $166.67 per month]. This is the Section 4980H(a) penalty that would have applied had Able not offered minimum essential coverage insurance coverage for the entire year.

50 or more Employees – The Penalty Zone§4980H(b) Penalty for not offering affordable Minimum Essential Coverage that provides Minimum Value - Example

NOTE: Affordability safe harbors are available that may provide relief from the §4980H(b) penalty with respect to some employees

50 or more Employees – The Penalty Zone§4980H(b) Safe Harbors

Form W-2 Safe Harbor: Employee contribution <= 9.5% of Box 1 W-2 wages

Rate-of-pay Safe Harbor: Employee contribution <=9.5% of amount calculated below Hourly employees: take hourly rate x 130 hours compared to

required contribution for lowest-cost, self-only coverage

Salaried employees: monthly salary compared to required contribution for lowest-cost, self-only coverage

Employer cannot reduce hourly rate or salary during the year. Also, if coverage is offered at least one day of the month, the entire month is counted

50 or more Employees – The Penalty Zone§4980H(b) Safe Harbors

Federal Poverty Line (FPL) Safe Harbor

Coverage is considered affordable if the employee’s monthly cost for the lowest-cost, self-only coverage does not exceed 9.5% of the FPL for a single individual

Annual FPL is divided by 12 for the monthly amount

Must use the most recently published poverty guidelines as of the first day of the plan year for the state in which the employee works

Individual Mandate – On an IslandPenalty for Remaining Uninsured

Minimum Essential Coverage is required to avoid the penalty (insurance purchased through the Exchange will qualify)

The penalty imposed on the uninsured under 18 is one-half of that imposed on adults

A taxpayer is responsible for providing coverage for someone if they are able to claim a personal exemption for that person

Some will be exempted from the penalty

Individual Mandate – On an IslandPenalty for Remaining UninsuredThe Individual Shared Responsibility Penalty

The per adult annual penalty is phased in: 2014: Greater of 1% of applicable income or $95 2015: Greater of 2% of applicable income or $325 2016: Greater of 2.5% of applicable income or $695 2017 and beyond: Indexed for inflation from $695

Applicable income = Excess of household income over the threshold filing amount

Individual Mandate – On an IslandPenalty for Remaining UninsuredThe Individual Shared Responsibility Penalty

The maximum household penalty is the greater of the annual percentage amount or 300% of the adult penalty

The penalty cannot exceed the cost of a bronze level plan

The penalty applies to any period essential coverage is not maintained (monthly)

The penalty is assessed through the Internal Revenue Code (no liens or levies allowed)

Individual Mandate – On an IslandPremium Assistance Credit

Credit available for those with incomes up to 400% of FPL, currently, $44,680 (single) $92,200 (family of four)

Insurance must be obtained through an exchange Current year advanced credit based on current year

income, if available Generally, the prior year tax data is used to determine

eligibility Assistance Credit is trued up when current year’s tax

return is filed

Individual Mandate – On an IslandReduced Cost Sharing

Cost sharing is available for those with incomes up to 250% of FPL

Only available for in-network services, does not include non-covered services

Must be enrolled in a silver-level QHP Total out of pocket is adjusted based on HHS guidelines

Individual Mandate – On an IslandWho is exempt from the Individual Shared Responsibility Penalty?

Individual Mandate – On an IslandWho is exempt from the Individual Shared Responsibility Penalty?

If the premiums exceed 8% of household income Includes the AGI of dependents who are required to file a

return Does not include non-taxed Social Security benefits