By John K. McGill, CPA, JD, and Timothy D. Gacsy, CPA, PFS, MBA, MBT
The recently upheld health-care reform legislation includes several new taxes, but there are still important tax breaks available to help dental practices pay for health insurance. Some of the changes are receiving a lot of attention and include a tax credit available to practices that offer health-care coverage to employees, penalty taxes, and changes in coverage requirements.
Small business tax credit
The new health-care reform legislation provides a tax credit to dental practices that offer health insurance coverage to their employees. This credit is available in two phases. For the years 2010 to 2013, the maximum credit is 35% of the practice's premium expenses. For tax years 2014 and beyond, the maximum credit increases to 50%.
The following conditions must be met for eligibility:
• A practice must have the equivalent of fewer than 25 full-time employees for the tax year. This is determined by dividing the total hours paid for all eligible employees during the year by 2,080. However, there is another method that may benefit doctors. Under the little-known weeks-equivalent method, an employee is credited with 40 hours of service for every week in which the employee is paid for one hour of service.
• Average annual wages must be less than $50,000 (to calculate, total wages paid during the tax year are divided by the number of full-time employees, and rounded down to the nearest $1,000).
• The practice must contribute at least 50% of the premium cost of a qualifying health plan offered to employees.
It should be noted that special rules apply to seasonal employees. Additionally, sole proprietors, partners, 2% shareholders of an S corporation, and 5% owners of a practice are generally not considered employees for purposes of the credit.
The maximum small business tax credit is available to qualifying practices with 10 or fewer full-time employees with average annual wages not exceeding $25,000. The credit is phased out for practices employing 10 to 25 full-time employees, and for practices that have full-time employees with average annual wages between $25,000 and $50,000.
The total practice premium eligible for the credit cannot exceed the average premium for the small-group market in the state where the practice offers health coverage. The IRS publishes the average premium for each state, and the credit is claimed on the practice's annual tax return as a general business credit.
Beginning in 2014, the maximum credit will increase to 50%; however, qualifying arrangements are restricted to health insurance purchased by the practice through a state-run health exchange. Starting in 2014, the credit can be claimed for only two years.
Beginning in 2014, a new penalty tax will be assessed for practices not offering health-care coverage to employees if the following two conditions exist:
• The practice has 50+ full-time employees (specifically, an average of at least 50 full-time employees in the prior year, and part-time employees are factored into the calculation), and
• At least one full-time employee purchases health insurance coverage through a state exchange, and is entitled to a tax credit or cost-sharing reduction.
The tax is assessed on a monthly basis, and is equal to the number of full-time employees exceeding 30 multiplied by $166.67 ($2,000 divided by 12).
Health plan coverage requirements
Beginning in 2010, several new and important coverage requirements were added. These include:
• Group plans that offer coverage for dependent children must extend the age for dependent coverage to age 26.
• Coverage for a plan participant cannot be rescinded except for fraud or intentional misrepresentation, and plans may not impose preexisting condition exclusions with respect to children under age 19.
• Plans may not impose lifetime limits on the dollar value of essential health benefits for plan participants and beneficiaries. Beginning in 2014, plans cannot impose annual coverage limits for essential health benefits.
• Most preventive care services and immunizations will not be subject to deductibles, copays, and coinsurance.
• By 2012, most practices must meet certain reporting and disclosure requirements, which include providing a summary of plan benefits and annual reports to participants, reporting annual enrollment and claims practices to the Secretary of Health and Human Services, and providing premium and coverage information to the IRS.
• For plan years beginning on or after January 1, 2014, plans may not impose preexisting conditions on any plan participant or beneficiary.
John McGill and Timothy Gacsy provide tax and business planning exclusively for the dental profession, and also publish the popular newsletter The McGill Advisory through John K. McGill & Company, Inc., a member of McGill & Hill Group, LLC. McGill & Hill Group's members and affiliates collectively serve as a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit www.mcgillhillgroup.com or call 877-306-9780 for more information.