Frequently Asked Questions
Increased Deductions for Health Insurance Premiums Paid by Qualifying Small Businesses and their Employees (Act 2008-559, amended by Act 2011-155)

 

• What requirements must be met for an employee to be considered a “qualifying employee?”

The employee must be a resident of Alabama who is employed by a qualifying employer. The employee can earn no more than $50,000 in wages, and report no more than $75,000 in adjusted gross income (AGI) on the Alabama individual income tax return (or $150,000 if married and filing a joint return).

• How will an employee know if he or she is employed by a “qualifying employer?”

The employer will have to inform the employee of the qualification.

• What requirements must be met for an employer to be considered a “qualifying employer?”

The employer can be considered as a qualifying employer if the employer has less than 25 employees.

• Does the 25 employee headcount include part time employees?

No. The count should be for full time employees.

• Who is considered a part time employee?

A part time employee is defined under 29 U.S.C. § 2101. The term “part-time employee” means an employee who is employed for an average of fewer than 20 hours per week or who has been employed for fewer than 6 of the 12 months preceding the date on which notice is required.

• Are the spouse and children of a sole proprietor counted in the number of employees for qualification purposes for the employer?

No.

• Does the number of employees allowed to qualify the employer (less than 25) include both qualifying and non-qualifying employees?

Yes, the requirement for "less than 25 employees" covers all full time employees (other than a spouse and children of a sole proprietor).

• Will a separate company in a controlled group that has less than 25 employees be treated as a qualifying employer when, collectively, the group has more than 25 employees?

Each company will file a separate return so each company should be considered as a separate employer; therefore, each employer (company) will be subject to the “less than 25 employees” limitation.

• At what point is the “less than 25” employee limit taken?    

The determining date should be the last day of the tax year. The employer must have less than 25 employees to qualify under the law. Is it the beginning of the year, end of the year, or are they disqualified if they go over 25 employees at any time during the year? End of the year (last day of tax year), regardless of the number of employees during the year.

• For an employer operating on a tax year other than a calendar year, what date is used to determine the “less than 25” employee limit?

The last day of the employer’s tax year.  For example, for an employer with a fiscal year ending 9/30, the number of employees as of 9/30 will be used to determine if the employer is a qualified employer.

• When are the deductions allowable under the law?

For individuals who are qualifying employees, an additional 50% deduction is available for tax years beginning after December 31, 2008, and for qualifying employers, the deduction is available for premiums paid after December 31, 2008. For tax years beginning after December 31, 2010, and additional 100% deduction is allowed.

• If an employer has a tax year other than a calendar year, can the employer deduct amounts paid on a 2010 fiscal-year tax return?

The qualifying employer can deduct on the 2010 fiscal-year return 200% of the amount paid during 2011 for insurance premiums on qualifying employees. For example, a qualifying employer with a tax year ending 9/30/11, may deduct on the 2010 return 200% of the premiums for qualifying employees paid from January 1, 2011 through September 30, 2011 (amounts paid from October 1, 2010 through December 31, 2010, will qualify for a150% deduction).

• Does the tax deduction apply for employers and their employees who choose to participate in the Individual Blue plans or only for group health plan participants?

The law allows the deduction for amounts paid by qualifying employers and by qualifying employees when health insurance premiums are paid as part of an employer-provided, health insurance plan; therefore, the Individual Blue plans do not meet these qualifications.

• Does this premium deduction include dental and vision plans, along with healthcare?

The new law mentions healthcare premiums, but does not mention any specific type of plans.  Insurance premiums paid for vision and dental plans should be considered as healthcare premiums; therefore, any premiums paid for these plans should qualify for the deduction.

• If the employee is part of a qualifying health plan and has full family coverage, can the employee use the full family coverage amount when calculating the deduction (or must the employee calculate the deduction amount based only on the coverage amount specific to just the employee without regard to the extra paid for the family)?

The total amount that the employee pays as part of a qualifying, employer-sponsored plan (including amounts paid for family or dependent coverage), qualifies for the deduction.

• If the business does not currently provide healthcare for part time employees, would they now be required to offer it to get the deduction?

No.

• Does the deduction require a specific deductible for the employer/employee?

No.

• If you have a Health Savings Account (HSA's), would the premiums still be deductible?

Yes. Alabama does not allow a separate deduction for amounts contributed to HSA’s, but any insurance premiums paid for healthcare would qualify for the premium deduction.

• Will the deduction be claimed by the qualifying employee as a medical expense on the Schedule A, subject to exceeding 4% of AGI?

The first 100% paid by the employee will be claimed as a medical expense on the Schedule A, subject to exceeding 4% of AGI, but the additional 100% deduction will be claimed as a deduction under Part II, of the Alabama Form 40, "Adjustments to Income."

• Can the qualifying employee claim the 100% deduction as an adjustment to income even if the employee claims the Standard Deduction on the employee's tax return?

Yes, on the Form 40.

• Will premiums paid include premiums being paid with pre-tax dollars?

Yes. While the first 100% of premiums paid by an employee under a cafeteria plan would not be deductible as a medical expense on the Schedule A for itemized deductions, the additional 100% deduction will be allowed as an adjustment to income on the Form 40.

• What are the support or documentation requirements for substantiating the AGI limits for a single or married employee?

The employer will have wage information about the wage requirement for the employee (can earn no more than $50,000 in wages), but the employee will have to inform the employer that the employee meets the AGI limits (reports no more than $75,000 ($150,000 if married filing jointly) for the applicable year).  There are no documents of verification required of the employee to submit to the employer.  The employer must rely on the employee's word for verification; however, the Alabama Department of Revenue will disallow any deduction by an employee if the AGI shown on the employee’s Alabama income tax return exceeds the limitations allowed.

• What date will the qualifying employer use in determining if the employee meets the AGI limits to become a qualifying employee?

For a calendar year employer (tax year ending 12/31), the employer will confirm with the employee that the AGI for the employee’s current tax year will not exceed the $75,000 or $150,000 limits. For an employer operating on a tax year other than a calendar year, the employer will confirm with the employee that the AGI for the employee’s prior tax year did not exceed the $75,000 or $150,000 limits. For example, an employer with a fiscal year ending 9/30/11, will confirm with the employee that the AGI reported on the employee’s 2010 tax return did not exceed the AGI limits.

• What date will the qualifying employer use in determining if the employee meets the wage limits to become a qualifying employee?

For a calendar year employer (tax year ending 12/31), the employer will confirm with the employee that the wages earned for the employee’s current tax year (amount reported on the W-2 for the current tax year) will not exceed the $50,000 limit. For an employer operating on a tax year other than a calendar year, the employer will confirm with the employee that the wages earned for the employee’s prior tax year did not exceed the $50,000 limit. For example, an employer with a fiscal year ending 9/30/11, will confirm with the employee that the wages reported on the employee’s 2010 W-2 did not exceed the wage limit.

• Are there any W-2 reporting requirements for this deduction?

No. Nothing is required to be reported on the W-2 Wage and Tax Statement.

• Will the employer be subject to a penalty if provided incorrect information from the employee?

No. If the employer has accepted the word of the employee as given truthfully and in good faith, the employer will not be penalized.

• How will a tax return preparer know that the preparer’s client is considered as a “qualifying employee” (or a “qualifying employer”) entitled to the deduction?

The client (qualifying employee or employer) will have to inform the tax return preparer of the qualification. The preparer may rely on the client’s statement unless the tax return preparer knows or should know, based on the preparer’s knowledge at the time the tax return is being prepared, that the statement made by the client is false. The preparer has no duty to investigate the statement made by the client. The Alabama Department of Revenue has available on the website a form which should be used by the employer and the employee as proof or substantiation of being a "qualified employer" and a "qualifying employee" (Small Business Health Insurance Deduction Information Form). The employer and employee should each retain a copy of the completed form for their records. The tax return preparer may rely on the information provided on the form.

• Will the tax return preparer be subject to a penalty if provided incorrect information from the client (qualifying employee or qualifying employer)?

No. If the tax return preparer has accepted the word of the client as given truthfully and in good faith, the tax return preparer will not be penalized.

 

Updated last: October 18, 2011