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Getting to the root of the small employer medical insurance tax credit: Is it right for your practice?

Sept. 20, 2010
By J. Leigh Griffith, Waller Lansden Dortch & Davis, LLP
Love it or hate it, the Patient Protection and Affordable Care Act impacts your dental practice both as a health-care provider and a small business owner. One element of the Act that could have a significant impact on small dental practices is the Small Employer Medical Insurance Tax Credit (SEMI tax credit). Touted as a way to help small businesses provide health insurance to employees and their families, the credit is not without caveats. For starters, the credit is only available for a limited time, so changing coverage amounts and employer contributions in the short term may not be productive to your practice in the long run. The best way to determine whether accepting the tax credit will be a profitable decision for your practice is to look into the details. Below are 10 questions and answers that provide insight into how the SEMI tax credit could impact your practice now and in the future.
1. Is my practice eligible for the SEMI tax credit?
To meet the criteria, your dental practice must provide non-elective contributions toward your employees’ health insurance premiums. Eligibility is based on the practice’s number of full-time equivalent employees (FTEs) and the average taxable compensation paid to these employees. Practices with 10 or fewer FTEs and an average taxable compensation below $25,000 receive the maximum credit, which is the lesser of 35% of the premiums actually paid for the employees, or IRS computed average premium for small employer markets in the state (50% for 2014 and 2015). The credit amount declines as the number of employees or the average taxable compensation increases. 2. What restrictions are associated with the credit? The SEMI tax credit ends when a practice hires its 25th employee, the average taxable compensation hits $50,000, or the combination of the number of employees and average taxable compensation hit the maximum allowance. Also, practice owners and their family members are not eligible for the SEMI tax credit, their compensation is not counted, and they are not included in the number of employees. Seasonal workers as defined by the Department of Labor are also excluded from FTE and average compensation calculations.3. How do I determine the status of employees and the number of hours they worked?An employee’s hours include each hour paid for the performance of duties during the employer’s taxable year, and each hour paid where no duties are performed (e.g., vacation, holiday, illness, disability). The IRS provides three calculation methodology alternatives: • Actual hours worked, including paid vacation, holidays, and illness days with a maximum of 2,080 hours per year • Days-worked equivalency, whereby the employee is credited with eight hours of service each day • Weeks-worked equivalency, whereby the employee is credited with 40 hours of service for each week. If actual hours are used, overtime (more than 2,080 hours) is excluded from the hourly total. The determination of FTE is calculated by dividing the hours determined above for all eligible employees by 2,080.4. How can I calculate the average annual wages per FTE?Divide the total wages paid by your practice to employees during the taxable year by the number of FTEs for the year and round down to the nearest $1,000. 5. In regards to the SEMI tax credit, how does my dental practice differ from other types of small businesses?There are no substantive differences between dental practices and other small businesses. The main difference is that dental practices have smaller numbers of, but highly trained, staff members (e.g., dental hygienists). This structure can lower the credit amount due to average wages because dental practices have fewer lower-income support staff. 6. How do I determine the eligible premiums my practice pays? For tax years beginning in 2010, the uniform percentage test will be met if your practice pays an amount equal to at least 50% of the premium for employee-only coverage. If you offer coverage that is more expensive than single coverage (such as family or self-plus-one coverage), you must pay an amount for each employee receiving the more expensive coverage that is no less than 50% of the premium for single coverage for that employee. For 2011 and later years, your practice will have to provide the same percentage of insurance premium payment for both employee-only and family coverage. In layman’s terms, your cost for employees choosing family coverage next year could be twice or more as that of an employee with single coverage.7. How does the SEMI tax credit affect my practice if I’m already providing health insurance benefits to my employees?If you already meet the uniform percentage test and are otherwise eligible, this credit is equivalent to free money for your practice. The only additional cost to your practice is the time spent calculating and claiming the credit on your federal tax return. 8. How does it affect my practice if I’m not providing health insurance?The credit may not be enough of an incentive for you to offer health insurance to your employees. Check with your accountant or other tax professional to verify the details for your practice.
9. How does it affect my practice if I’m only paying for a portion of the insurance premium?
This credit may entice you to add or supplement your benefits plans if the portion you are paying is otherwise insufficient. You can take one or more of the steps below to increase your insurance coverage in order to take advantage of the credit: • Pay additional premium amounts to reach or exceed the 50% level• Reallocate dollars you currently pay by reducing the subsidy for above 50% payments for employee-only coverage in 2011 and increase the payment for family coverage• Drop payments for limited vision and dental plans and use those funds for primary health care plan payments• Drop offer of family coverage and only provide employee coverage • Modify 2011 insurance by reducing coverage and increasing deductibles and co-pays so that existing employer support increases as a percentage.10. How long will the SEMI tax credit be available? The SEMI tax credit gravy train ends for existing practices in 2016. At that time, dental practices can do one of the following: • Continue existing health insurance coverage without reimbursement, which will lead to an increase in employment costs, or • Decrease health insurance coverage, which can lead to employee dissatisfaction.Deciding whether or not to provide employees with health insurance coverage is an issue all small businesses, including dental practices, face. The SEMI tax credit offers some assistance to business owners, but it is not something that should be accepted without careful consideration. If you are unsure about how to proceed, contact your attorney, accountant, or tax professional for guidance.
J. Leigh Griffith is a partner at Nashville-based Waller Lansden Dortch & Davis LLP, and heads up the firm’s tax practice. He is a Fellow of the American College of Tax Counsel, and has extensive experience in state and federal taxes, estate planning, and limited liability companies.