Health Insurance Tax Credit for Small Employers – Do You Qualify?

As a founder of a new company, you’re probably overworked, underpaid, and swamped with problems that everyone is looking to you to fix.  You probably also have some valuable people working with you and you want to keep them happy and healthy. For small employers, the Affordable Care Act created a tax credit that could make it easier for you to afford to offer health coverage to your employees. Of course, there are limits and conditions (this is an IRS program, after all).

•    The credit is available only to employers that have no more than 25 full-time equivalent
(FTE) employees for the tax year;

•    The average annual wages of the employer’s FTEs cannot exceed $50,000; and

•    The employer must pay a uniform percentage of at least 50% of the premium for each
employee enrolled in the health coverage.

In calculating the number of FTEs, average annual wages, and the premiums paid, the following employees are excluded:

•    Self-employed individuals, including sole proprietors and partners in partnerships;

•    Individuals who own more than 2% of a subchapter S corporation;

•    Individuals who own more than 5% of a corporation; and

•    Certain family members (including spouses) and dependents of employees who are
otherwise excluded.

The number of FTEs is determined by aggregating all of the hours of service for the employees who are not excluded (up to 2,080 hours per employee) and dividing the total by 2,080. Fractions are rounded down.

Average annual wages are determined by aggregating all of the wages paid to employees who are not excluded and dividing it by the number of FTEs. If the result isn’t a multiple of $1,000, it is rounded down to the next lowest $1,000.

The tax credit is a percentage of the amount the employer contributes toward the premiums. The maximum credit of 35% is available only for employers with ten or fewer FTEs and average annual wages of $25,000 or less. The credit is reduced for employers with more FTEs (up to 50) or higher average annual wages (up to $50,000). The credit can be carried back (but not to tax years before 2010) or forward.

There are other conditions and requirements, of course, but more information is available at these IRS websites:

The Government Accountability Office recently reported that far fewer small employers claimed the credit than were estimated to be eligible, perhaps because of complexity in the recordkeeping and calculations required. But if the tax credit can make it more affordable for you to offer health coverage, the paperwork shouldn’t stand in the way.

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