Pursuant to the Patient Protection and Affordable Care Act (PPACA), small employers – those with fewer than 50 full-time employees (including full-time equivalent employees/FTEs) – are not subject to the Employer Shared Responsibility.
However, small employers that have 25 or fewer FTEs may be eligible for incentives from the federal government to provide their employees with health coverage.
Small employers who provide health insurance coverage to their employees may not realize they can claim a federal income tax credit on their annual federal tax returns.
Unfortunately, a very low percentage of qualified business owners are taking advantage of this credit, according to government reports. An employer with fewer than 25 FTEs that offers insurance coverage may be eligible for a tax credit, but must meet specific IRS guidelines to be eligible.
Which Expenses Qualify?
The expenses that an employer may count toward the tax credit include the premiums that he or she pays for each employee enrolled in one of its health insurance plans. Because this credit only applies to health insurance, contributions to self-insured plans such as Health Reimbursement Arrangements (HRAs), Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are not eligible for the credit.
What Are the Qualifications?
To qualify for the Small Business Health Care Tax Credit, employers must meet criteria relating to three aspects of their business:
- Firm size: First, there are restrictions on the number of employees that an employer may have. A qualifying employer must have less than the equivalent of 25 full-time workers when totaling all individuals’ hours of employment. When all part-time and full-time hours of employment are combined and divided by a full-time, 40-hour week, and if the number of employees needed to cover the total hours is less than 25 employees, the employer will qualify for the credit.
- Provide health care coverage: Secondly, the employer must confirm that he or she covers at least 50% of the cost of health care coverage for employees. This is determined using the firm size equivalent number mentioned above. Next, the employer must know the cost required to cover a single full-time employee’s insurance premium.
- The employer must then make the following calculation: Equivalent firm size multiplied by (X)=the cost paid for an individual premium and divided by (/) two.The above calculation is the percentage of health care coverage the employer must cover to qualify for the credit. Therefore, they do not have to pay full coverage for each employee. They could reach the required premium with some full coverage and some partial coverage of employees.
- Wages paid: Lastly, employers must pay their workers an average of less than $50,000 per year to qualify.
Any employer that satisfies all three of these requirements is eligible for the tax credit; however, the smaller, lower wage employers will receive a larger tax credit than those employers who just barely meet the criteria. Click here to view the IRS instructions for the Small Business Tax Credit.
Calculating the Tax Credit
The Small Business Health Care Tax Credit currently offers a maximum benefit of 50% of an employer’s premium contributions (35% for non-profits) to a health insurance plan. Only the employer contribution is counted toward the credit—not the entire premium cost. In order to qualify for this maximum credit, an employer must have 10 or fewer FTEs who have average wages of $25,000 or less. The benefit becomes slowly less generous as employers reach the $50,000/25 FTE threshold when the credit zeroes out. Employers can utilize a variety of calculators and tools to figure out the exact credit for which they are eligible given their specific workforce.
The credit will be available only to those who purchase insurance through the Small Business Health Options Program (SHOP) Exchanges.
Further, employers will be able to claim this credit for only two years.
One example that the IRS provides is an auto repair shop that has 10 employees whose combined total wages are $250,000 for an average salary of $25,000. This employer is eligible for the maximum tax credit of 50% because of her number of employees and their wages. If the employer contributes $70,000 for health insurance to cover her workers, she would receive a 50% credit in 2014 that results in a $35,000 credit.
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