Attention Small Business Owners
Do you employ fewer than 25 full-time employees (or full-time equivalents/FTEs)?
Do you provide your employees with health coverage?
If you answered YES to both of these questions, you may be eligible for a federal income tax credit on your annual federal tax return!
Most people know that under the Affordable Care Act (ACA), small employers (those with fewer than 50 FTEs) are not required to provide health coverage for their employees. But a large percentage of employers with under 25 FTEs don’t realize a tax credit is available if they provide health coverage. The rules regarding tax credits apply to the years 2010-13. Regulations regarding the tax credit’s future starting in 2014 have yet to be released by the Internal Revenue Service (IRS).
Here are the IRS guidelines for the Small Business Health Care Tax Credit (refer to the IRS instructions for more details):
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 the company’s 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:
1. 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, if the number of employees needed to cover the total hours is less than 25 employees, the employer will qualify for the credit.
2. 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, the employer does not have to pay full coverage for each employee. The company could reach the required premium with some full coverage and some partial coverage of employees.
3. 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. Further information can be found here in 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 35% of an employer’s premium contributions (25% 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.
It is worth noting that, starting in 2014, the tax credit will increase from a maximum of 35% of premium costs to 50% (35% for non-profits). 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.
|Example 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 the 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.|
Don’t miss out on a tax credit! If you believe you may be eligible or want to learn how you can become eligible, give us a call!
This update is provided for informational purposes. Please consult with a licensed accountant or attorney regarding any legal and tax matters discussed herein.