Thursday, August 06, 2009
If you are self-employed or run a small firm, this is for you. Section 421 controls the credit supposedly provided for small businesses to provide their employees health insurance coverage.
SEC. 421. CREDIT FOR SMALL BUSINESS EMPLOYEE HEALTH COVERAGE EXPENSES.Here are my questions:
(a) In General- Subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to business-related credits) is amended by adding at the end the following new section:
`SEC. 45R. SMALL BUSINESS EMPLOYEE HEALTH COVERAGE CREDIT.
`(a) In General- For purposes of section 38, in the case of a qualified small employer, the small business employee health coverage credit determined under this section for the taxable year is an amount equal to the applicable percentage of the qualified employee health coverage expenses of such employer for such taxable year.
`(b) Applicable Percentage-
`(1) IN GENERAL- For purposes of this section, the applicable percentage is 50 percent.
`(2) PHASEOUT BASED ON AVERAGE COMPENSATION OF EMPLOYEES- In the case of an employer whose average annual employee compensation for the taxable year exceeds $20,000, the percentage specified in paragraph (1) shall be reduced by a number of percentage points which bears the same ratio to 50 as such excess bears to $20,000.
`(1) PHASEOUT BASED ON EMPLOYER SIZE- In the case of an employer who employs more than 10 qualified employees during the taxable year, the credit determined under subsection (a) shall be reduced by an amount which bears the same ratio to the amount of such credit (determined without regard to this paragraph and after the application of the other provisions of this section) as--
`(A) the excess of--
`(i) the number of qualified employees employed by the employer during the taxable year, over
`(ii) 10, bears to
`(2) CREDIT NOT ALLOWED WITH RESPECT TO CERTAIN HIGHLY COMPENSATED EMPLOYEES- No credit shall be allowed under subsection (a) with respect to qualified employee health coverage expenses paid or incurred with respect to any employee for any taxable year if the aggregate compensation paid by the employer to such employee during such taxable year exceeds $80,000.
`(d) Qualified Employee Health Coverage Expenses- For purposes of this section--
`(1) IN GENERAL- The term `qualified employee health coverage expenses' means, with respect to any employer for any taxable year, the aggregate amount paid or incurred by such employer during such taxable year for coverage of any qualified employee of the employer (including any family coverage which covers such employee) under qualified health coverage.
`(2) QUALIFIED HEALTH COVERAGE- The term `qualified health coverage' means acceptable coverage (as defined in section 59B(d)) which--
`(A) is provided pursuant to an election under section 4980H(a), and
`(B) satisfies the requirements referred to in section 4980H(c).
`(e) Other Definitions- For purposes of this section--
`(1) QUALIFIED SMALL EMPLOYER- For purposes of this section, the term `qualified small employer' means any employer for any taxable year if--
`(A) the number of qualified employees employed by such employer during the taxable year does not exceed 25, and
`(B) the average annual employee compensation of such employer for such taxable year does not exceed the sum of the dollar amounts in effect under subsection (b)(2).
`(2) QUALIFIED EMPLOYEE- The term `qualified employee' means any employee of an employer for any taxable year of the employer if such employee received at least $5,000 of compensation from such employer during such taxable year.
`(3) AVERAGE ANNUAL EMPLOYEE COMPENSATION- The term `average annual employee compensation' means, with respect to any employer for any taxable year, the average amount of compensation paid by such employer to qualified employees of such employer during such taxable year.
`(4) COMPENSATION- The term `compensation' has the meaning given such term in section 408(p)(6)(A).
`(5) FAMILY COVERAGE- The term `family coverage' means any coverage other than self-only coverage.
`(f) Special Rules- For purposes of this section--
`(1) SPECIAL RULE FOR PARTNERSHIPS AND SELF-EMPLOYED- In the case of a partnership (or a trade or business carried on by an individual) which has one or more qualified employees (determined without regard to this paragraph) with respect to whom the election under 4980H(a) applies, each partner (or, in the case of a trade or business carried on by an individual, such individual) shall be treated as an employee.
`(2) AGGREGATION RULE- All persons treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as 1 employer.
`(3) DENIAL OF DOUBLE BENEFIT- Any deduction otherwise allowable with respect to amounts paid or incurred for health insurance coverage to which subsection (a) applies shall be reduced by the amount of the credit determined under this section.
`(4) INFLATION ADJUSTMENT- In the case of any taxable year beginning after 2013, each of the dollar amounts in subsections (b)(2), (c)(2), and (e)(2) shall be increased by an amount equal to--
`(A) such dollar amount, multiplied by
`(B) the cost of living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins determined by substituting `calendar year 2012' for `calendar year 1992' in subparagraph (B) thereof.
If any increase determined under this paragraph is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.'.
(b) Credit To Be Part of General Business Credit- Subsection (b) of section 38 of such Code (relating to general business credit) is amended by striking `plus' at the end of paragraph (34), by striking the period at the end of paragraph (35) and inserting `, plus', and by adding at the end the following new paragraph:
`(36) in the case of a qualified small employer (as defined in section 45R(e)), the small business employee health coverage credit determined under section 45R(a).'.
(d) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2012.
- What is the tax credit for small businesses? (50% is the right answer, meaning you should be able to get half of your premium payments back in lower taxes.)
- Ask them to define a small business. Then ask your congressperson or senator to explain the phaseout of the credit. I wish I could to tell you what the answer here is, but I've read that five times and I still am not sure I understand it.
- What is the limit on wages you can pay to qualify for this credit? I would refer you to the example Keith Hennessey pointed out a few weeks ago. He has two stories, a 50-year-old bachelor who works for a five-person firm and earns $50k/yr, and a couple who are the only employees of a small tourist shop in a beach community earning $90k/yr. Many of you readers may be this kind of person. What happens to your firm, to your family income? In particular for the second family, do they get the 50% credit (which, if I'm not mistaken, Hennessey did not take into account)? If the family had three kids and all were made employees, would they now be exempt (because their income drops below $20k/worker)?
UPDATE (9 pm): Commenter and my colleague David Switzer explains the phaseout of the credit:
So if you pay your employees $30,000, the excess is $10,000 and the ratio of the excess to $20,000 is 50%. Thus, the government would not cover 25% of the cost of health care (since 25/50 is 50%). So it looks like employers get nothing when they pay above $40,000 -- which is right at the median personal income for full-time workers above the age of 25.So you get a credit only if you hire relatively unskilled labor. I assume this means only full-time employees? I don't see anything in the definitions in H.R. 3200 that helps. And that phaseout may mean Hennessey's calculations were right (I should have known :( )