One of the premier goals of the Affordable Care Act ("ACA") is to get everyone covered by some form of health insurance. The main aspect most people hear about is the "mandate" that employers provide health insurance to their employees. While this mandate only applies to those employers with 50 or more employees (and it has been delayed until 2015) the ACA encourages small businesses to provide health care coverage by offering attractive tax credits. Proper understanding of the ACA, and some planning, can help you maximize your tax credit.
To qualify for the tax credit, you must be an "eligible small employer." This is defined as an employer with fewer than 25 full-time equivalent employees with average annual wages not exceeding $50,000, and the employer must pay at least 50% of the health insurance premiums for a qualified plan purchased through the health care exchange.
While this seems fairly straight forward, the definition of "employee" has several exceptions. For example, part-owners of the business and their relatives may not count. In some circumstances, seasonal workers may not count, either. This may actually be favorable for the business in qualifying for the tax credit. If the business has more than 25 employees, or the average annual wage exceeds the applicable limits, it is possible that not all of the employees will count for purposes of determining the tax credit. The downside, or course, is that the employer cannot claim any credit for the premiums paid for these non-qualifying employees, either.
For 2014, the amount of the credit is up to 50% of the employer contributions to employee health care plans. The full amount of the credit is available to employers with 10 or fewer employees who have average annual wages of $25,000 or less. The credit is reduced on a sliding scale if the employer has more than 10 employees, and a separate reduction applies if the average wages of the employees is more than $25,000 and up to $50,000. The credit may also be reduced if the employer premiums paid are more than they would have been if the employees had been enrolled in a small group market in the state where they work.
Tax credits reduce the amount of tax owed, dollar for dollar. This is preferable to a deduction, which reduces taxable income. To be consistent, the amount of the credit that a business qualifies for reduces the deduction for health insurance premiums paid by the same amount; e.g. you cannot claim a tax credit and a tax deduction for the same premium paid. Also, this particular tax credit is "non-refundable," which means that if the credit reduces your tax liability below zero you do not get a refund, and part of the credit goes unused. Any unused credit, however, can be carried backward to past tax years or forward to future tax years.
It is also important to note that the tax credit has been available since 2010 - although the amount of the credit was previously limited to 35%, rather than 50%. In those prior years, it was not required that the insurance be purchased through the exchange (because no exchanges existed).
If you are a "small employer" who pays (or has paid) at least 50% of your employees health insurance premiums, you should consult with a tax professional to see if you qualify for the credit. Tax years 2010, 2011, and 2012 can be amended if you did not claim the tax credit for which you qualified. This could result in substantial refunds, or the credit can be applied to future tax years.
If you were unaware of the small business tax credit for employee health insurance expenses, or if you did not believe you would qualify, you should have your tax advisor take a second look. It is possible that the some of your employees hours or wages would not count toward qualifying for this valuable tax credit.
Also, if you have not previously offered health insurance to your employees, this may be a good time to reevaluate your benefits plan. Although the mandate does not apply to employers with fewer than 50 employees, the tax credit could make it affordable for you to offer your employees health insurance. Health insurance is one of the most valuable benefits an employer can offer to help attract and retain good employees.
Robert A. Franco has a Master of Laws degree (LL.M.) in Business and Taxation. His firm offers a wide range of representation to small businesses, including tax advice, employment law issues, business succession planning, and litigation services.