The Patient Protection and Affordable Care Act of 2010, commonly referred to as the Affordable Care Act (ACA) or Obamacare, was enacted to make health insurance affordable and accessible to businesses and individuals alike. It has built-in measures that provide for subsidized premiums, credits, affordable rates, penalties etc. The primary purpose of the ACA was to reduce the number of uninsured by way of individual and employer mandates and affordable quality health care through various available choices on the online marketplaces known as Exchanges or through insurance brokers and agents.
One of the provisions of the ACA, the health care credit for employers, helps small businesses receive a tax credit for their health insurance expense based on criteria preset by the credit.
Small business and even tax exempt (non-profit) employers who provide health insurance for their employees may be able to receive a tax credit for their health insurance expense. If you are a small business employer with fewer than 25 full-time equivalent (FTE) employees earning average salaries of less than $50,000 per FTE and pay a uniform percentage of the premium for all employees, then you may be eligible for the credit. The credit may be carried back for a refund of previously paid taxes or forward and used against future taxes.
Starting in 2014, the maximum credit available is 50% of premiums for small businesses and 35% of premiums for tax exempt employers.
Calculating the credit is complex and proper records need to be maintained to substantiate the calculations. A quick glance at the employer’s payroll reports for wages and hours will show if the employer qualifies or not. A general understanding of how the credit is calculated is as follows.
Your payroll provider should be able to easily run a report to determine your number of full-time equivalent (FTE) employees and their average wages.
You should know, however, that certain employees are not considered employees for the purpose of this tax credit. Their hours and wages are excluded from the calculation.
- A sole proprietor
- Partner in a Partnership
- A 2% or more shareholder of an S Corporation
- A 5% or more shareholder in a Corporation
- Family Members and Dependents of Owners
- Leased Employees – included only if services have been provided for at least a year. Premiums paid by the leased company are not included.
- Seasonal Employees – included only if services have been provided for more than 120 days, but premiums paid on their behalf can be used to determine the credit.
Most importantly, the credit requires the employer to have paid premiums under a qualifying arrangement that meets the ACA’s affordability requirements. Generally, this means an arrangement where the employer should pay a uniform percentage (at least 50%) of the premium cost for single coverage only (no family or dependents) for each employee regardless of the percentage of premium paid. Other arrangements where less than 50% of premiums paid would also qualify such as for different levels (self plus one, family) as long as single coverage is paid at least 50% of the premium cost. For tax years 2014 onwards, the credit is available only if the employer purchases health insurance coverage for employees through the Small Business Health Options Program (SHOP) marketplace/exchanges at healthcare.gov.
The credit phases out gradually for employers with more than 10 FTEs and average wages of more than $25,400(adjusted for inflation) until the limits are reached, beyond these numbers the average wages and FTE can separately reduce the credit to zero.
The credit cannot be claimed more than two consecutive years starting with the year 2014 or after. Any prior credits claimed do not count towards the two year limit. Any amount of credit claimed must reduce the deduction for the cost of the coverage.
If you have never filed for the credit before, you may still be able to claim the credit by filing an amended return for the prior years.
Here are three examples to help illustrate the impact of the tax credit:
- A business with 15 FTEs earning average annual wages of $55,000 that pays premiums towards its health insurance will have their credit completely phased out since average wages is greater than $50,000
- A business with 10 FTEs earning average annual wages of $45,000 that pays premiums of $40,000 for 6 of its employees. In this case, the business qualifies for the credit albeit it is slightly phased out due to wages over $25,400. The credit calculates to approximately $4500.
- Employers with part time employees qualify as well as long as they pay health insurance premiums for employee coverage. A business with 15 part time employees calculating to 8 FTEs based on hours and earning average wages of $23,500 pays premiums for 4 of its employees for $28,000. In this case, the business gets full credit for its health insurance expense since it is below the phase out limits. The credit is 50% of its premiums i.e $14,000. The credit is also limited by the State average premiums available for that State and any credit claimed must reduce the health insurance deduction by the same amount.
The above article provides a general overview of the credit and its workings, but inherently is more complex and requires in-depth look at the numbers and insurance contracts, so please feel free to contact Kavya Machettira at 781-769-6300 for more information.