• Healthcare Credits

Health Care Tax Credit for Small Businesses

by Noel Bagwell
for Executive Legal Professionals, PLLC

March 20, 2015

Don’t Forget to Claim Your Credit

Small businesses, including employers who are tax-exempt (e.g., non-profit organizations, churches, etc.), could qualify for a tax credit to help with the cost of providing health insurance coverage for low-to-moderate-income employees, if they offer to such employees health insurance plans which conform to the guidelines set forth in the mis-named “Affordable Care Act” (a.k.a. Obamacare).

What does your business need to do to qualify? It cannot have claimed the tax credit in both of the previous two consecutive years, and must have purchased the qualifying health insurance plan from the SHOP Marketplace for small businesses. PLUS, the employer must pay for at least half of the premiums paid for each employee. Oh, and if your business has 26 or more Full-Time Equivalent (FTE) employees, making an average salary of more than $50,000.00, the business will not qualify for the tax credit.

Okay, But I still Have Some Questions

We’re going to tackle a couple of the FAQs about the Small Business Health Care Tax Credit posted on the irs.gov website. If you want to read the full FAQ, without our insightful commentary, click here.

What if an employer has employees in multiple states?

Beginning in 2014, the employer applies the average premium for each employee based on the rating area where the employee enrolls for coverage in a SHOP Exchange. For years 2010 through 2013, the employer applies the average state premium for each employee based on the state where the employee works.

This is not the most straightforward Q&A, which is why we selected it for comment. You might be wondering whether your business gets to count FTE employees as separate pools in each state. The answer is, “No.” You may have 12 FTE employees in Tennessee, 15 in Georgia, and 7 in Colorado; because your business has more than 26 total FTEs–no matter what state they work in–your business does not qualify for the Small Business Health Care Tax Credit.

The quoted answer given to the above quoted question focuses on how the average is calculated for the purpose of calculating whether the employer has met the requirement of paying half of the average premiums for its employees. Remember, as we pointed out in the second paragraph of this article, the employer must pay for at least half of the premiums paid for each employee to qualify for the Small Business Health Care Tax Credit.

What is the maximum credit for a tax-exempt eligible small employer?
For taxable years beginning in 2014 and forward, the maximum credit is 35% of the tax-exempt employer’s premium payments made on behalf of its employees under a qualifying arrangement for a QHP offered through a SHOP Marketplace. For taxable years beginning in 2010 through 2013, the maximum credit is 25% of the employer’s premium payments made on behalf of its employees for health insurance coverage under a qualifying arrangement. See the “What is a qualifying arrangement?” question on this page. The credit is refundable for tax-exempt employers. However, the amount of the credit cannot be more than the total amount of income and Medicare tax (i.e., hospital insurance) the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages for the year.

So, in English, the maximum Small Business Health Care Tax Credit (1) a tax-exempt (2) eligible (3) small business employer can receive is equal to (a) 35% of the payments the employer made on behalf of its employees (b) towards health insurance premiums (c) for Qualifying Health Insurance Plans (d) purchased through a SHOP Marketplace. The requirements of 1-3 and a-d, above must be met. If any of the listed elements is missing, the employer may be disqualified or the amount of their credit may be affected.

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As of the time of this writing, there are 26 additional questions-and-answers on this topic posted on the IRS website (see above link). If you own or manage a small business and need assistance navigating your legal responsibilities, please contact Executive Legal Professionals, and a licensed attorney will be happy to assist you.

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