Can your practice benefit from SEMI?

November 5, 2010

The Patient Protection and Affordable Care Act includes an element that could have a significant impact on physicians-not as medical providers, but as small business owners.

Key Points

The Small Employer Medical Insurance (SEMI) tax credit is promoted as a tool for helping small businesses provide "affordable" health insurance coverage for employees. However, the legislation requires a closer look to determine whether the credit makes sense for use in your practice.

On one hand, the SEMI tax credit can provide immediate benefits for a small employer now providing medical insurance for its employees. However, employers who must change coverages and contributions to receive the credit could be in a difficult position in a few years, when the credit is scheduled to lapse.

PROCEED OR NOT?

Thus, the big question: Should you "take the money and run" now or proceed knowing that the credit is scheduled to end in 2016, possibly causing you to have to reduce or end coverage for employees? To answer this question, it's important to familiarize yourself with all aspects of the SEMI tax credit and its potential benefits and drawbacks.

The SEMI tax credit reimburses small businesses for 35% of the lesser of the actual or regional average as determined by the Department of Health and Human Services for employee medical insurance premiums for 2010 through 2013, followed by a maximum credit of 50% of such premiums for the first 2 consecutive years the employer offers insurance through a state-sponsored insurance exchange.

It should be noted that the income tax deduction for compensation expenses is reduced by the amount of the SEMI tax credit. In the case of some practices, this could reduce the net economic value of the credit by a third or more. It is also important to note that the credit that becomes available in 2014 is only for policies purchased through insurance exchanges.

FTES, COMPENSATION DETERMINE ELIGILIBILITY

To be eligible for the credit, you must provide nonelective contributions toward your employees' health insurance premiums. The eligibility for, and the amount of, the credit has 2 primary determinants: the number of full-time equivalent employees (FTEs) and average taxable compensation. (Owners and their family members are not eligible for the SEMI tax credit, which means that they and their compensations are not counted.)

To receive the maximum credit, you must have 10 or fewer FTEs, and their average taxable compensation must be below $25,000. As the number of employees and/or the average taxable compensation increases, the amount of the credit declines. The credit ends altogether when your practice hires its 25th employee, the average employee taxable compensation hits $50,000, or the combination of the number of FTEs and average taxable compensation hits the cut-off point of qualification for the credit.

Physician practices with more than 10 but fewer than 25 FTEs and offering annual salaries averaging $25,000 to $50,000 per FTE are eligible to receive a smaller credit.

Determining the number of FTEs, annual wages per FTE, and employer premiums eligible for the SEMI credit requires complex calculations. Therefore, most practices probably will benefit from having them performed by an accountant or other tax professional.

"FREE" MONEY FOR QUALIFYING PRACTICES

For qualifying physician practices that already offer health insurance to employees, the message should be "take the money and run." Although certain coverage and payment level requirements exist, the credit represents "free" money for many practices and "almost free" money for many more.

The marginal cost lies in performing the calculations and claiming the credit on the federal tax return. For those practices not providing health insurance, or providing less than 50% of the cost, this could act as an incentive to increase their support.