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The Patient Protection and Affordable Care Act 2010

Health care reform is now the law of the land. And nearly every individual and business in the U.S. will be affected by the new law's provisions.

The law generally requires most individuals to have health insurance coverage. This will be accomplished with credits for small businesses who supply health care insurance and penalties to larger businesses that don't. There will also be credits for taxpayers who obtain insurance and penalties in the future for those who do not have coverage. That is the easy part to explain.

The Small Business Health Care Tax Credit

Starting in 2010, this credit is good news for small businesses and small not-for-profit organizations that provide health insurance coverage to their employees. Generally, the credit is for qualifying small businesses or not-for profits with no more than 25 full time (or full time equivalent) employees with average wages of no more than $50,000.

If the business employer pays at least 50% of the (single coverage) employee health care insurance premiums, then their credit will be up to 35% of those employer's payments subject to certain limitations. The credit for not-for-profit organizations would be 25%. In 2014 and 2015, these credits increase to 50% and 35%.

If the business has 10 or fewer full time equivalent (FTE) employees with average annual wages of less than $25,000, they will get 100% of the credit.

Some additional information regarding this credit:

  • The credit phases out when the FTE and average wage limits are exceeded.
  • The deduction for health insurance premiums paid by the employer is reduced by the amount of the credit.
  • The employer's health insurance deduction is, of course, net of the portion paid by employees.
  • The credit for a business offsets the employers regular or the Alternate Minimum Tax (AMT) tax liability but is not refundable. However, the unused portion is a business credit that can be carried back one year and forward 20. (Except in 2010 when it can not be carried back. It can only be carried forward.)
  • The credit for a not-for-profit employer will reduce income tax withholdings and Medicare tax liability down to zero.
  • The requirement that the employer pays at least 50% of the premium applies to single coverage. For example: if single coverage is $400/month, and family coverage is $700/month, as long as the employer covers at least $200 of the expense, they will satisfy the 50% requirement.
  • Seasonal employees are disregarded unless they work more than 120 days in the year.
  • Sole proprietors, their family, partners in a partnership, shareholders owning more than 2% of S Corporation, and any owner of more than 5% of other businesses are not considered employees for this credit.
  • Members of a controlled group or an affiliated service group are treated as a single employer for this credit.

Some of the other provisions of this Health Care Reform include:

Starting in 2010:

  • Coverage until age 26 for children of taxpayer even if child is no longer dependent of taxpayer. This coverage would start with plan years starting after September 23, 2010.
  • Adoption tax credit increased by $1,000 and extended through 2011.
  • 10% excise tax on services at tanning salons.

Starting in 2011:

  • W-2 reporting of employer sponsored health insurance coverage
  • Increase in penalty to 20% of HSA and MSA withdrawals not used for qualified medical expenses.
  • Over the counter medicines will no longer be qualified medical expenses for FSA's, HSA's and MSA's.
  • There will be changes to SIMPLE Cafeteria Plans

Starting in 2012:

  • Form 1099's will be required from all businesses for any individual or corporation from which the business buys more than $600 in goods or services in a tax year. Previously the requirement just included individual workers other than wages and salaries. This is a big change and will affect most businesses.

Starting in 2013:

  • Additional .9% Medicare tax on high wage earners. (wages and self employment income for Married Filing Jointly taxpayers over $250,000, Married filing Separate taxpayers over $125,000, and others over $200,000.)
  • 3.8% Medicare surtax on investment income of higher income taxpayers (same limits as above but on unearned income including interest and dividends, rent, capital gains, royalties, and passive activity income).
  • Increase to 10% AGI limitation on medical expenses if taxpayer is itemizing deductions and is under the age of 65.
  • Starting in 2014:
  • Minimum essential coverage mandate for individuals. Credits and penalties will be assessed.
  • Employer responsibility mandate. Credits and penalties will be assessed.
  • Increase in Small Business Health Care Tax Credit percentages to 50% and 35% (business and not-for-profit)

At Dermody, Burke & Brown, CPAs, LLC, it is our commitment to be your most trusted advisor. Our professionals are dedicated to keeping you informed about how the new health care environment will impact your company.


The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.


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