2014 Tax Changes: Individual Mandate

The individual mandate that we have been hearing about for years is finally in effect.  What does that mean?

Beginning in 2014, taxpayers must have insurance that provides "minimum essential coverage."  A list of what health care plans that qualify as providing minimum essential coverage is provided on the healthcare.gov website.

If you do not have insurance that provided "minimum essential coverage", you are subject to a penalty.

In 2014, the penalty is the greater of:

• 1 percent (%) of your yearly household income; or
• $95 per adult and $47.50 per child under the age of 18.

In 2015, the penalty increases to the greater of:

• 2 percent (%) of your yearly household income; or
• $325 per adult and $162.50 per child under the age of 18.

In 2016, the penalty increases to the greater of:

• 2.5 percent (%) of your yearly household income; or
• $695 per adult and $347.50 per child under the age of 18.

After 2016 the penalty is adjusted annually for inflation.

Are there any exemptions from having to pay the penalty?

Yes, there are several exemptions available based upon your circumstances.  There are exemptions for the following situations:

1. You are uninsured for less than 3 months of the year;
2. The lowest-priced coverage available to you would cost more than 8% of your household income;
3. You don't have to file a tax return because your income is too low;
4. You are a member of a federally recognized tribe or eligible for services through an Indian Health Services provider;
5. You are a member of a recognized health care sharing ministry;
6. You are a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare;
7. You are incarcerated (either detained or jailed), and not being held pending disposition of charges;
8. You are not lawfully present in the United States; or
9. You qualify for a hardship exemption.

But I thought I heard that the implementation of the Individual Mandate has been delayed?

The Obama Administration announced earlier this year that it is delaying the implementation of the individual mandate until October, 2016 for millions of Americans who have lost their insurance coverage.  If you believe you qualify, you will want to discuss your situation with an expert in the medical insurance field and potentially apply for the "hardship" exemption.

Small Business Tax Credit

Small business owners need every tax credit that they can get.  One tax credit that you are likely entitled to but may not know about is the Small Business Health Insurance Premiums tax credit.

For tax years 2010 through 2013, the federal income tax credit was worth a maximum 35% of premiums paid by small business employers.

Starting in 2014, the federal income tax credit is worth a maximum 50% of premiums paid by small business employers.

 

There are a few qualifications that you must meet in order to claim this credit:

1. Starting in 2014, the premiums must be paid on a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace.
   
   In California, there are, currently, 6 health insurance companies that are available for year-round enrollment in the SHOP program.  To view the list of qualifying health insurance companies and the available plans, click here.
   
   
2. There must be fewer than 25 full-time equivalent employees.
   It is important to understand that this does not mean less than 25 employees.  The number of full-time equivalent employees is a calculated figure that is determined by taking the total number of hours worked by all non-owner employees and dividing that number by 2,080.  The resulting figure is then rounded down to the nearest whole number.
   
   For example, if you had 13 employees and they all worked for a total of 1,500 hours during the year, you would have 9 full-time equivalent employees (13 x 1,500 = 19,500; 19,500 / 2,080 = 9.38; 9.38 rounded down is 9).
   
   
3. The average wages must be less than $50,000.
   
   To determine this number, you divide the total wages of the non-owner employees by the number of full-time equivalent employees.
   
   For example, if you paid your employees a total of $390,000 during the year, you would have average wages per full-time equivalent employee of $43,333 ($390,000 / 9).
   
   
4. The health insurance premiums must be paid through a qualifying arrangement.
   To be considered a "qualifying arrangement", the employer must pay at least 50% of the single-coverage insurance for its employees.  The IRS has ruled that the employer does not have to pay for the premiums covering the employee's spouse or children.  Generally, an employer must pay a uniform percentage of the premium cost for each enrolled employee's health insurance coverage.  However, exceptions exist for businesses who utilize either composite billing (uniform premiums paid rather than a uniform percentage) or list billing (differences in premiums exist for each employee based upon age or other factors).

The maximum credit is for 50% of the premiums paid in 2014 (35% in prior years).  However, it may be less than 50% if: 1) there are more than 10 full-time equivalent employees; 2) the average wages exceeds $25,000; or 3) actual health insurance premiums exceed average premiums paid for health coverage in the employer's area.

This tax credit can be carried back or forward to other tax years. 

In addition to the tax credit, an employer is entitled to claim a deduction for the excess health insurance premiums.  For example, if an employer pays $10,000 in health insurance premiums and claims a $5,000 tax credit, the employer would be entitled to take a $5,000 deduction for the remaining health insurance premiums.

If you have any questions about the Small Business Health Insurance Premiums tax credit, or if you would need assistance in claiming this tax credit, please do not hesitate to contact me.

As always, I appreciate you leaving your feedback in the comments section below.