Monday, December 22, 2014

Quick guide to the Small Employer Health Insurance Credit

Qualifying small businesses with fewer than 25 employees and average wages under $50,800 can qualify for tax credits of up to 50% (35% for tax-exempt entities) of the health insurance cost if they pay at least half the premiums for their employees and have purchased the policies from a SHOP exchange.  Small businesses are allowed to claim the credit for only two consecutive years after the tax year 2013.  To be eligible to receive the credit, the following prerequisites must be met:

1.      There are fewer than 25 full-time equivalent employees.  The full-time equivalent employee calculation is relatively simple, all you need to do is follow the 3 steps:
  • Step 1: Compute the sum of the employees' hours worked (No greater than 2,080 hours per employee)
  • Step 2: Divide the sum from Step 1 by 2,080
  • Step 3: Truncate the decimal part of the result (e.g. 6.8 is 6 full-time equivalent employees)
  • Do you have seasonal employees?  If yes, then seasonal employees who work fewer than 120 days in the tax year are not included in the full-time equivalent employee calculation, but premiums paid on their behalf are included in the calculation for the credit.  Please note, the employee must be seasonal and not just terminated/quit before 120 days worked.
  • NOTE that sole owners, partners, and shareholders who own more than 2% are not included as employees.

 2.      The average annual wages is less than $50,800.  To calculate the average annual wages, divide total wages paid divided by the number of full-time equivalent employees.  NOTE that sole owners, partners, and shareholders who own more than 2% wages are not included in the average annual wage calculation.

3.      Health insurance premiums must be paid by the employer in a uniform percentage of at least 50%.

4.      The qualified health plan must be purchased through a SHOP exchange.  This is new for 2014.  For more information on SHOP exchanges, please visit this site

If the 4 prerequisites above are met, use the chart below to estimate of how much of a credit you can claim:

Brian Koleszar, CPA