Independent Contractor Compliance Blog - by Collabrus™

The two thousand plus page Health Care and Reconciliation Bills are complex and rich with provisions that will take time to be fully discovered. Many of the provisions that create additional costs and that have the greatest effect on our lives, do not take effect immediately, but will be phased in over the next decade.

Here is one of the provisions.

A tax credit for small businesses that provide Health Care for their workers.

Effective for tax years beginning after December 31, 2009, the bill grants a tax credit for small employers who provide health insurance for their employees. To qualify as a small employer the company must:

• Employ 25 or less full-time equivalent employees (see below).
• The employees’ average annual wages can be no more than $50,000.
• The employer must purchase health insurance that qualifies under the law.
• Employers must contribute at least 50 percent of total premium costs or 50 percent of a benchmark premium amount provided in the law.

How much credit?

The maximum credit is 35% of the premiums paid by the employer, but it is prorated so that an employer with 10 or fewer employees (who are paid average wages of $25,000 or less per year) will receive the full 35%. The credit is phased out as these numbers go higher.

The wage limits will be adjusted for inflation beginning in 2014 and the potential maximum credit will increase to 50%. However, it will then only become available to an employer that purchases coverage for its employees through a state exchange.

The employer can claim the credit on its tax return.

Actually, it’s not that simple.

Just the number of employees a company has at any given point can not be used to decide if a company qualifies for the credit. To calculate how many employees a company has to qualify for this credit the law uses the concept of “Full Time Equivalent” (or FTE).

An employer’s FTEs employees are calculated by dividing the total hours worked by all employees during the employer’s tax year by 2080. (NOTE: no more than 2080 hours can be counted for any single employee).

Therefore, one employee working 2080 hours in the year will equal one FTE employee. If you had two part-time employees, each working 1040 hours, together they would equal one FTE.

Contingent workers can qualify for coverage

If you provide your contingent workers with health care insurance, even if they work less than a full year, each individual part-time worker’s time on the job can be added together with the others (using the FTE formula above) to calculate FTE employees for the credit. Offering a robust health insurance package to your contingent workers is a proven way to attract and retain the best talent. To avoid the hassles of dealing with contingent worker onboarding and offboarding, and increase their level of risk mitigation for worker misclassification and co-employment, many organizations elect to outsource this to a specialized service provider like Collabrus who becomes the employer of record for their contingent workers.

But wait, there’s more…

This credit is intended to be one of the “carrots” for employers. Next time we’ll look at a few of the “sticks”.