A Small Business Prescription for Health Insurance Premium Ta Credits

(This is part of our series of “sweet 16”
year-end tax planning ideas.)

Employers are facing increased obligations in 2015 relating to the health insurance coverage provided to employees, but at least some small business owners might benefit from a special tax break.

For one thing, the cost of health insurance continues to rise, outpacing inflation each year. For another, employers have to cope with new or greater responsibilities under the Affordable Care Act (ACA). Notably, the employer mandate to provide minimum essential health insurance kicks in next year for midsized employers with 51 to 99 full-time and full-time equivalent employees (FTEs). Larger employers are already affected while small employers are exempt.

Saving grace: A small business may benefit from a health insurance premium credit in 2015 if it provides health insurance coverage to employees. Effective for 2014 and thereafter, the maximum credit amount has increased from 35% to 50% of the cost of premiums contributed by a small business.

A small business is eligible for the credit if:

It has fewer than 25 FTEs;
The average annual wages of its employees are less than $50,000 (adjusted for inflation to $51,600 in 2015); and
It pays a uniform percentage for all employees that is equal to at least 50% of the premium cost of employee-only insurance coverage.

Each part-time employee counts as a fraction of an FTE. For example, two half-time employees equal one FTE for purposes of the credit.

Beginning in 2014, a small business can qualify for the credit for health insurance only if the coverage is purchased through a Small Business Health Options Program (SHOP) Marketplace established under the ACA. Therefore, small employers should “SHOP around” and investigate their opportunities before the end of the year.

Note also that a small employer may claim the credit for only two consecutive tax years, beginning with the first taxable year in or after 2014 in which it attaches a Form 8941 (Credit for Small Employer Health Insurance Premiums) to its income tax return. However, if an employer claimed the credit in any of the years from 2010 – the year the credit first became available – through 2013, those years do not count towards the two-year restriction.

Finally, be aware that a new law signed on October 7 gives small employers a reprieve from increases in the health insurance premiums these employers would likely owe, beginning in 2016. Other changes relating to the ACA may be forthcoming.

— (See more of our 2016 “sweet 16” year-end tax planning ideas.) —