P PACA, as the health reform law is being called, created a tax credit of up to 35% for small employers, which provide medical insurance coverage for their employees. The law indicates an employer here in Connecticut may qualify if:
+ It pays no less than 50% of the employee’s premiums.
+ It has less than 25 full-time employees.
+ The average wages of its employees must be less than $50,000 per year.
Note: Owners and family members in the business are not counted as employees for the tax credit.
This credit can be claimed on the organizations annual tax return for 2010 through 2013. The 35% maximum credit becomes 50% in 2014.
When reviewing the actual P PACA provisions we find:
+ The 35% maximum tax credit is only available for employers with 10 or fewer employees and whose average salary is $25,000 or less.
+ Firm’s with up to 25 employees whose average wages is up to $50,000 may qualify for a credit, which will be considerable lower. Firm with 25 employees & average salary of 50k will not receive any credit. Media coverage often implies the full 35% is available to firms with 25 or fewer employees.
Lets look at how this really works:
+ When an employer offers medical insurance they normally take a business deduction for the part of the premium they pay. IRS guidance however, indicates employers are not eligible for a deduction and a tax credit on the same amount.
+ The actual calculation to determine the credit has many details but at a high level the firm, at tax time, will add all their business info into the income tax software, the amount spent on employee medical insurance is included as a deduction, and the button to calculate tax due is hit. The software is opened again, the medical insurance deduction is removed, the button is hit again, and a higher tax amount is produced. The software would be opened again, the tax credit would be entered, the button is hit again to learn the tax due.
Note: One of the tax credit calculation details is the allowable annual premium is limited in Connecticut to $5,419 for single and $13,484 for family coverage. This could impact firms whose average age is about 50 or higher.
Bottom line - the real value, if any, to an employer will just be the difference to their tax obligation using the credit vs the tax due if the business deduction is used.