Small Employer Health Insurance Premium Tax Credit
As part of the Affordable Care Act is a provision that encourages small businesses and small tax-exempt organizations to offer health insurance coverage for the first time or maintain coverage they are already offering. In general, a credit is available to small employers who pay at least 50% of the cost of single coverage for their employees.
In order to qualify, the employer must have less than 25 full time equivalent (FTE) employees whose average annual wages are less than $50,000 and the employer pays at least 50% of the health insurance premium. The credit can be up to 35% of the premiums paid (as defined below) and is claimed on Form 3800. Even certain small tax-exempt employers can qualify for up to a 25% refundable credit. The tax credit for tax exempt employers is claimed on Form 990-T. Tax exempt organizations are those described in Section 501 (c) that are exempt from tax under Section 501 (a).
Employers that are under common control (including affiliated service groups, partnerships, sole proprietorships, tax exempt entities, etc.) are treated as a single employer.
The following are not considered to be employees for the computation of the credit: owner of a sole proprietorship, partner in a partnership, more than 2% S Corporation shareholder, 5% or more shareholder in a C Corporation, 5% or more owner of capital or profits in a business that is not a corporation (such as a LLC), and family members of persons listed above. When computing the hours worked, wages paid and premiums paid, amounts attributable to these individuals should be deducted. Seasonal employees who work 120 days or less are also not considered employees for this computation of full time equivalents and average salaries, but premiums paid on their behalf are counted for purposes of taking the credit.
FTEs are computed as follows: Total hours of service for the tax year for all individuals considered employees (as defined above) divided by 2,080. The result is rounded down to the next whole number. Hours of service are defined as each hour for which an employee is paid or entitled to be paid (including vacation pay, sick pay, holiday pay, etc.) Hours of service may also include layoffs or leaves of absence under certain circumstances. The credit is reduced starting with more than 10 FTEs and is phased out with 25 or more FTEs. Do not include more than 2,080 hours for any one employee.
Average annual wages are computed by taking wages paid for the tax year for all individuals considered to be employees (as defined above) divided by total FTEs (as computed above). The result is rounded down to the next lowest multiple of $1,000 (ex: $25,999 would be rounded down to $25,000). The credit also begins to be phased out starting with average wages greater than $25,000 and is phased out at $50,000.
The credit is taken on the employer portion of premiums paid by for health insurance coverage for individuals that are considered to be employees. Thus, premiums paid though a salary reduction arrangement under a Section 125 Cafeteria Plan are not treated as an employer paid premium. Health insurance coverage generally consists of benefits covering medical, dental, vision, long term care, nursing home care, home health care and community based care plans. It does not include coverage for accident or disability, supplemental liability, general or auto liability, workers compensation, etc.
The credit can also be reduced where the employer paid premium exceeds the state average premiums as published by the Internal Revenue Service. For example, the state average premiums for New York State are $5,849 for Single coverage and $14,688 for Family coverage. To the extent the employer paid premium exceeds these amounts, the credit is reduced.
As noted above, certain tax exempt organizations qualify for a refundable credit, so long as the tax credit does not exceed the amount of payroll taxes paid. Payroll taxes paid are defined as the federal income taxes required to be withheld from an employee's wages in the calendar year, plus Medicare taxes required to be withheld during the calendar year plus Medicare taxes required to be paid by the employer during the calendar year.
For more information or questions on this topic please contact a member of the firm's National Health Care Practice in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040 or visit us on the Web at uhy-us.com.
Article written by Richard M. Lipman, CPA National Health Care Practice Partner Back to top | 
