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Don’t Overlook the Credit for Small Employer Health Insurance Premiums

The tax law provides a credit for small business employers who pay the health insurance premiums for their workers. This credit can be as much as 35% (25% for tax-exempt organizations) of the insurance premiums paid by the employer in 2013.

Beginning in 2014, the credit percentage increases to 50% (35% for tax-exempt organizations), and claiming the credit is limited to two consecutive years, but if the credit was claimed for any of years 2010 through 2013, those years aren’t counted for the two-year limit. In addition, for 2014 and later years, the insurance must be purchased through a state exchange, and the coverage must be uniform and not less than 50% of the premium cost.

To qualify for the credit, the employer can’t have more than 25 full-time equivalent employees, and the average wage of the employees cannot exceed $50,000 for the year. The 25 full-time equivalent employee limit is computed by taking into account both full-time and part-time employees for the year using a formula.

To see if your firm may qualify for the credit, complete the two worksheets below. The results at lines 6 and 9 will tell you if your firm is under the maximum full-time equivalent employee and average wage limitations.

Determine the Number of Full-Time Equivalent Employees:

1. Enter the number of employees who worked 2,080 hours or more during the year:

2. Multiply line 1 by 2,080:

3. Enter the total hours worked by all employees who worked less than 2,080 hours during the year:

4. Enter the total of lines 2 and 3:

5. Divide the result on line 4 by 2,080:

6. Number of full-time equivalent employees (round line 5 down to the next whole number, unless the number is less than one, in which case enter 1:

If line 6 is greater than 25, stop – your firm does not qualify for this credit.

Determine the Average Annual Wage:

7. Enter the total of all wages paid to employees during the tax year:

8. Divide line 7 by the number of full-time equivalent employees (line 6):

9. Average annual wage (round amount from line 8 down to the next whole $1,000):

If the amount on line 9 is $50,000 or less, you may qualify for the credit. Besides meeting the limits of lines 6 and 9, to qualify for the credit an employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis.

The amount of the credit gradually phases out if the number of full-time equivalent employees exceeds 10 or if the average annual wage of the employees exceeds $25,000. Under the phase-out, the full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual wages of less than $25,000.

The credit is in lieu of taking a business deduction for the employer-paid premiums used in computing the credit. It is also part of the general business credit, which may exceed the amount of the business’ income tax, and any unused credit in the current year can be carried back one year and then forward until used up but no longer than 20 years.

When counting employees and wages, make the following adjustments:

  • Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the small-employer health insurance credit. Thus, the wages and hours of these business owners and partners, and of their family members and dependent members of their household, are disregarded in determining full-time equivalent (FTE) employees and average annual wages, and the premiums paid on their behalf are not counted in determining the amount of the credit.
  • Leased employees are included in employee count, but insurance premiums paid for the benefit of the leased employee by the leasing company are not taken into account in determining the credit.
  • The number of hours of service worked by, and wages paid to, an employer’s seasonal worker are not taken into account in determining the FTE employees and average annual wages of the employer unless the worker works for the employer more than 120 days during the tax year. Premiums paid on behalf of seasonal workers can be counted in determining the amount of the credit. There is no minimum number of hours of service that a worker has to work in a day before that day is taken into account for purposes of the 120-day test.