Small Employer Health Insurance Premiums Credit, Does your business Qualify?

Since 2010, employers have been able to take a credit for the health insurance premiums they have paid for their employees. Starting in 2014, there are major changes to this credit and how it will be calculated.

Here are the basics for the credit under the old rules and new rules.

2010 – 2013:

35% maximum credit for small employers (25% maximum credit for tax-exempt employers)
Premiums must be paid on behalf of employees enrolled in a qualified health plan
Available for all 3 years

2014 or later

50% maximum credit for small employers (35% maximum credit for tax-exempt employers)
Premiums must be paid on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace
Only available for 2 consecutive years

As you can see, the credit becomes larger in 2014, but it is only offered for plans that are offered through the SHOP Marketplace and it is only available for 2 years. It becomes harder to qualify for the credit but there is a greater benefit for those that do qualify.

To qualify for the credit, the employer must:

Pay premiums for employee health insurance under a qualifying plan (through the SHOP Marketplace for 2014)
Have fewer than 25 full-time equivalent employees (FTEs)
Pay average wages of less than $50,000 per FTE

For purposes of this credit, a full-time employee works 2,080 hours per year. To calculate the FTE, you would divide total hours of service by 2,080. For instance, if you have two employees that worked 1,040 hours each, they would equal one FTE. When calculating FTEs, round the number down to the nearest whole number. To determine hours of service, employers can use one of three methods: Actual hours worked, Days-worked (8 hrs per day), or Weeks-worked (40 hrs per week).

The calculation for average wages is fairly simple, you divide the total wages by the number of FTEs. Again you will round this number down, but this time it will be to the nearest thousand.

Enough about how to calculate the credit, here is a list of items we will need from the employer in order to compute the credit, for both taxable and tax-exempt employers:

List of all employees paid during the year
Wages paid to each employee
Total hours of service for each employee
Type of health insurance coverage (Single or Family) for each employee
Amount of health insurance premiums paid by employer for each employee
Percentage of premiums paid by employer for each employee

In addition, we will need the following for tax-exempt employers:

Federal income tax and medicare tax withheld from the employee's wages
Medicare tax paid by employer

As you can tell, this credit does require considerable work from both the employer and the accountants. However, the benefit usually exceeds the work. We all know health insurance isn't cheap, so this credit allows small employers to get up to 35% (or 25% for tax-exempt) off their health insurance costs.

If you think you may qualify for this credit, please give us a call at 609-953-1400 or email us at info@paddencooper.com. The deadline to amend 2010 returns to claim the credit is March 15^th, 2014. Do not miss out on this great opportunity!

Adam Necelis | 01/31/2014

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Small Employer Health Insurance Premiums Credit, Does your business Qualify?