Blog By: Jeanne Hines, SPHR
The small employer tax credit was created in 2010 upon the passage of the Affordable Care Act. Next year, a few key aspects of the tax credit will change. To be eligible for the health care tax credit, an employer must:
• Have fewer than 25 full-time equivalent employees (FTEs);
• Pay average annual wages of less than $50,000 per FTE; and
• Maintain a “qualifying arrangement.”
In general, for the 2010 through 2013 taxable years, a qualifying arrangement is one where the employer pays premiums for each employee enrolled in its health insurance coverage in an amount equal to a uniform percentage of not less than 50 percent of the premium cost of the coverage.
For 2014 and later taxable years, the maximum credit increases to 50 percent of premiums paid for taxable small employers and 35 percent of premiums paid for tax-exempt small employers. But those credit percentages are based on the average premium in the small group market in the rating area where employees sign up, instead of the specific premium chosen by employees. The maximum tax credit is only available to employers with 10 or fewer FTEs and average annual wages of $25,000 or less.
Also beginning in 2014, the health care tax credit is only available to an employer for two consecutive taxable years, and cannot start before the 2014 taxable year. Finally, the new rules require employers to obtain group coverage through an Exchange to claim the credit. If you are not currently offering plans on a calendar year, the law allows for some transition relief. Your accountant will be able to provide additional information on the small employer tax credit.