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)

 

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).

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

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

No. The count should be for full time employees.

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.

No.

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

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.

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.

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.

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.

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).

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.

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.

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.

No.

No.

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.

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."

Yes, on the Form 40.

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.

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.

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.

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.

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

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

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.

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

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