Small Business Health Care Tax Credit: Is Your Organization Eligible?
As the upcoming tax season approaches, many small businesses will be assessing whether they qualify for the health care tax credit enacted in the
Patient Protection and Affordable Care Act. Employers need to perform certain calculations to find out if their organization is eligible for the credit.
“Employers not only have to conclude which premiums qualify for the credit, but also determine the number of employees and the average annual wage,” says Karen Thomas, a benefit services principal with LarsonAllen.
The credit amount varies based on the tax status of the employer and the year. For this year, a taxable employer will get a 35 percent credit and a tax-exempt employer will get a 25 percent credit.
Small business criteria
Generally, small employers that pay at least half of the premiums for employee health insurance coverage may be eligible for the credit. The credit is specifically targeted to help small businesses and tax-exempt organizations that meet three criteria:
- The employer has no more than 25 full-time equivalent employees for the tax year.
- Average annual wages per employee do not exceed $50,000.
- The employer contributed at least 50 percent of the premiums for employee health care.
An employer with 25 or more employees could qualify for the credit if some employees work part-time.
Premium cost limits
Premiums paid for employee health insurance coverage that qualify for the credit include major medical coverage, and may also include dental coverage, vision coverage, long-term care, nursing home care, home health care, and supplemental coverage. Employer contributions to health reimbursement arrangements, flexible spending arrangements, and health savings accounts do not qualify for the credit.
However, the premium costs are subject to limits in each state, as determined by the U.S. Department of Health and Human Services (HHS).
“Employers should thoroughly review the rules for this credit, since it is new and may come under close scrutiny by the IRS,” says Thomas. She recommends that employers consult additional guidance from the IRS and HHS.
How we can help
A significant amount of information can be gathered before the year-end to help plan for the tax credit. We can provide templates to assist you with gathering this information. Speak with your tax advisor about the information you need, so you can begin your preparations now.
Karen Thomas, Principal
kthomas@larsonallen.com or 704-998-5227
View our benefits and tax principals.