September 6, 2010 | last updated May 29, 2012 9:49 pm
Q&A

Aaron Johnson, CPA, talks taxes

Q&A talks with Aaron Johnson, CPA, of Borgida & Company PC in Manchester.

Q: The new health care reform includes new taxes, but there are also some tax breaks available to help small businesses pay for health insurance. What are some of the available tax breaks?

A: For small employers (25 or less employees), there are tax credits based on the amount of insurance premiums that the employer is paying. The calculation is rather involved with a number of factors included to arrive at the final credit amount. The factors include the number of equivalent full-time employees, the average wages being paid, the insurance premiums being paid by the employer, and the level at which the employer is paying for the insurance.

Q: There is a credit available in two phases. For the years 2010 through 2013, the maximum credit is 35 percent of the employer's premium expenses. For tax years 2014 and later, the maximum credit increases to 50 percent. What size employers are available for the credits?

A: For tax years 2010 through 2013 a full tax credit of 35 percent of health insurance premiums paid is available to employers of 10 or less equivalent full-time employees earning an average of less that $25,000. The credit is reduced as the number of full-time equivalent employees and the average annual payroll is increased. The top limit for receiving any credit is 25 or less equivalent full-time employees earning an average of $50,000 or less. For tax years 2014 and after, the tax credit is increased to 50 percent of premiums purchased through the new Insurance Exchange for up to two years. The employer has to be paying a minimum of 50 percent of the employee's insurance premium based on the single premium amount.

Q: Are their tax strategies associated with these credits? Will employers be better off with more expensive plans for their employees to achieve more savings through the 50 percent credit?

A: Many small employers are struggling just to stay afloat and cannot afford to provide their employees with any kind of insurance benefits. The only employers this will benefit are the ones who are considering providing some insurance or the ones who already are providing insurance coverage. Any tax strategies would have to be analyzed case by case as no two situations are the same. I would strongly suggest that you consult with your tax advisor regarding your specific situation in the next couple of months to go over your options and plan for year-end. Should an employer go out and purchase a more expensive plan? Not likely. It doesn't make sense to spend the extra dollar to save 18 cents in tax. A more prudent approach would be to review what your funding level is right now. Are you covering at least 50 percent of the single premium rate for the employee? If not, then it may make sense to increase the employer contribution to qualify for the credit.

Q: The health-care reform legislation contains a number of tax changes. Some of these changes take effect immediately; others won't have an impact for a few years. Which tax change is going to have the most immediate impact?

A: Other than the tax credits mentioned above, there are two other tax changes that are immediate. First is the inclusion in health coverage of any child of a covered employee who has not attained the age of 27 at the close of the year. Second is a 10 percent excise tax on indoor tanning services effective July 1, 2010. Another change effective Jan. 1, 2011 is that medical expenses reimbursed under a medical reimbursement account will no longer include over-the-counter drugs. Only drugs acquired with a prescription will qualify for reimbursement.

Q: What is your advice going to be to employers about the penalty tax? Will it be more feasible for some employers just to pay the tax and not offer health coverage?

A: The approach to the penalty tax is going to be "let's wait and see." There's a lot of time between now and January 2014 when that provision of the Reform Act takes effect. That means a lot of chances for the law to be changed or amended as the economists and Congress figure out just how this is going to affect business and individuals. As the law stands now, it can potentially be more advantageous to just pay the penalty. But remember, this only applies to employers with 50 or more employees. Anyone with less than 50 employees is exempt from having to provide coverage and, therefore, will not be penalized.

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