As businesses of all sizes grapple with the difficulties caused by the COVID-19 pandemic, budgets are being scrutinized, staffing levels are being assessed and fringe benefits are being reviewed. At the same time, employees are more concerned with their health insurance coverage than ever. While various government stimulus programs have been passed to help businesses remain afloat, businesses are and will continue to be looking for ways to manage reduced cash flow expectations. In many cases, benefit reductions are a more attractive and practical option than other alternatives, such as staff reductions.

Medical benefits are very costly and with cash tight due to government mandated shutdowns, the potential for a recession, phased re-openings, and great uncertainty in the near future, re-examining a client’s situation can produce new avenues for tax savings that can help your client stay in business and retain employees. One such opportunity could be the small business health care tax credit reported on Form 8941, Credit for Small Employer Health Insurance Premiums.

In order to qualify for the small business health insurance premium tax credit (§45R) the business must meet the following eligible small employer (ESE) criteria:

• Fewer than 25 full-time equivalent (FTE) employees
• Average annual wages of less than $55,200 per FTE (2020)
• Paid uniform percentage of at least 50% of the adjusted cost of the employer-sponsored health care coverage through their state’s marketplace’s Small Business Health Options Program (SHOP)

For clients who were previously borderline, the reduced operations may adjust their situation, so they now qualify. Let’s walk through an example.

Hobert Manufacturing is a specialty automotive parts company that supplies aftermarket accessories to high-performance vehicles. As a non-essential business, the state mandated it shut down for 14 weeks during 2020. Prior to the shutdown, Hobert had 28 FTE employees. Additionally, when it re-opened, product demand was low, and the business was forced to reduce staff by five employees given uncertainty of future demand for at least the moderate term. Now that Hobert has fewer than 25 FTE employees, they may qualify for the credit.

Let’s take this a step further and assume in 2019, Hobert’s average annual wages were $60,000 (exceeding the 2019 adjusted amount of $54,200). Assuming no changes to Form 8941 instructions will be made for 2020, the 14 weeks Hobert was closed would reduce the employee hours of service by 560 hours (14 x 40). This is approximately a 27% reduction in hours for the typical year (2080 hours). If Hobert averaged $60,000 in average annual wages in 2019, the reduction in hours would reduce wages to $44,400.

This credit can be as much as 50% of the premiums paid, which during difficult times like these can be a real lifeline to small businesses like Hobert Manufacturing.

As tax professionals, your primary duty is to inform clients of the tax consequences of their situations and help them determine tax strategies that are in their best interest. To truly meet this goal, we have to look comprehensively at the client’s unique situation. As that situation evolves, sometimes you will need to review items the client may not have qualified for previously.

As you work with your clients to help them adjust and re-tool for the current storm, helping them review the various aspects of their benefits packages, and the ramifications and tax savings opportunities (like the small business health care tax credit), your client is likely to have additional questions like should they change from an HSA to an HRA or QSEHRA? Ensuring you are up to date on these plans, their qualifying criteria, advantages and limitations is crucial to be prepared for your clients’ questions.

If you’re interested in learning more about this topic, we have an upcoming opportunity to review these employer health insurance topics and more during our upcoming webinar Navigating Employer Provided Health Insurance July, 21 and 22.