New health care law includes tax breaks
In March, the United States Congress passed the Patient Protection and Affordable Care Act, often referred to as “Obama Care.”
This health care act continues to be very controversial. It has many provisions that do not take effect until several years in the future and that might be changed in coming years. However, there are several provisions that take effect in 2010.
• Small employers may qualify for credit on health premiums.
• Children under 27 may now qualify for parents’ plan.
• Many provisions won’t become effective for several years.
Small business credit
The legislation creates a tax credit for employers with 25 or fewer full-time-equivalent employees and an average wage of $50,000 or less.
In order to qualify for the credit, the employer must offer health insurance to his or her employees and pay at least one-half of the employee’s premium.For 2010 through 2013, the maximum credit is 35% of the employer’s contributions.
Employers with 10 employees or fewer are eligible for the full credit. The credit phases out for employers with more than 10 employees and is eliminated for employers with more than 25 employees.
The credit is also phased out if the average wage of the employees is $25,000 or more.A full-time employee equivalent is calculated by dividing total hours worked by 2,080.
For example, Johnson Farms has five employees, three of whom worked 2,080 hours in 2010, and two who worked 1,040 hours. Total hours worked were 8,320 hours, which when divided by 2,080 calculates out to four full-time-equivalent employees.
Owners, partners, family members and seasonal workers who worked 120 days or less are not included in the calculation. Premiums paid on their behalf are not eligible for the credit.
The credit applies to all health insurance premiums paid in tax years, beginning in 2010 — even though the law was not enacted until March of 2010.
Children under 27
Children of employees are now allowed to be included under an employee health care plan up to the age of 27.
Self-employed persons can claim a deduction for the cost of health care for children under 27 as well.
A child is defined as a son, daughter, stepson, stepdaughter or eligible foster child of the taxpayer. The taxpayer no longer has to be an employee or dependent to qualify.
In addition, group health plans must make coverage available to unmarried children of employees until the child is 26.This provision was effective as of March 23, 2010.
Effective in 2011
Starting in 2011, employees must indicate on the employee’s W2 how much the employee is receiving in employer-paid health care benefits.
There has been a lot of misinformation about this provision. This amount will not be taxed. The reporting is being done only for information purposes.
The new law provides for a cap on flexible spending accounts. Starting in 2011, the law imposes a $2,500 maximum on the amount that can be flexed for health care purposes.
The new law also eliminates the deductibility of over-the-counter drugs. In order to be deductible, the drug must be prescribed by a doctor.
There are many other provisions of the law that are effective in 2012, 2013, 2014 and 2018. They include increased Medicare taxes, mandatory coverage and increased 1099 reporting. Time will tell what will happen to these provisions.As always, consult with your tax adviser before proceeding.
Anderson is a farm financial management consultant in Redwood Falls. E-mail him at
This article published in the October, 2010 edition of THE FARMER.