Small Employer Health Insurance Credit

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Small Employer Health Insurance Credit

kidsBy Chuck Randolph

About the Credit

Since 2010, a credit against taxes has been available to qualified small business employers who pay more than 50% of the health insurance premiums for their employees. For 2013, the maximum credit is 35% of the lesser of:

  • The employers contribution to a qualified health insurance arrangement for employees for the year or
  • The amount that would have been contributed if the total premium for each employee equaled the average premium for the small group market in which the employer offered health insurance.

For Small Business Employers

The credit is non-refundable for small business employers. This means the credit can only reduce tax owed to zero but cannot result in the taxpayer receiving a refund of tax.  The credit begins to phase out when the number of FTE employees exceeds 10 and the annual average wages exceed $25,000. The credit is completely phased out when FTE’s exceed 25 and the annual average wage per FTE exceeds $50,000.  Any unused credit can be carried back one year and forward up to twenty years.

For Tax-Exempt Employers

The maximum credit for tax-exempt small employers is 25% for 2013. The credit for tax-exempt entities is refundable so long as it does not exceed the income tax withholding and Medicare tax withheld and employers matching portion of the Medicare tax.

Who Qualifies for the Credit

To be considered a qualified small business or tax-exempt employer for the credit the following must be met:

  • Employer with 50 or less employees.
  • Employs fewer than 25 full-time equivalent (FTE) employees during the tax year.
  • Pays average annual wages of less the $50,000.
  • Pays premiums for its employees under qualified health insurance arrangement.

Premiums paid to a health insurance issuer for health care coverage for the following insurance coverage’s count toward the credit:

  • Major medical coverage.
  • Limited scope dental or vision.
  • Long-term care, nursing home care, home health care, and community based care or any combination.
  • Coverage for specified disease or illness.
  • Hospital indemnity or fixed indemnity insurance.
  • Medicare supplemental health insurance.

Changes for 2014 and 2015

A major change for the credit is currently scheduled for 2014 & 2015.

The Affordable Care Act established health insurance Marketplaces (also known as the Affordable Insurance Exchanges) to be available for use beginning January 1, 2014. There will be one Marketplace for individuals and one Marketplace for business. The business marketplace is named Small Business Health Options Program (SHOP). SHOP will be open to employers with 50 or fewer employees. Employers are required to notify employees of the Marketplaces no later than October 1, 2013. Enrollment for coverage through SHOP is also scheduled to begin October 1, 2013.

For 2014 & 2015 the credit increases from 35% to 50% for private employers. For tax-exempt employers the credit increases from 25% to 35%. But as the law currently stands, the credit for tax years 2014 & 2015 will only be available to small businesses who obtain health insurance coverage for their employees through SHOP.  This was not a requirement to receive the credit for tax years 2010 – 2013. Also beginning in 2014 the credit phase-outs thresholds for annual average wage of $25,000 and $50,000 will be indexed for inflation.

Please call us if you have any questions about the credit.  For more information, please visit this article on the IRS website.

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