New Tax Credit for Health Insurance Premiums

The recent Health Care Reform law has created a new tax credit for certain employers who pay for their employee’s health care premiums. The tax credit, which is effective immediately, can cover up to 35% of the premiums a small business pays to cover its workers, says Clinton Baker, CPA and manager with Kennedy and Coe, an accounting and business consulting firm based in Kansas.

The tax credit is available to farm employers who provide health care and have fewer than 25 employees earning an average compensation of less than $50,000. The maximum credit for years 2010 through 2013 is 35%; the credit increases to 50% for years 2014 and 2015.

“The law allows for exclusion of owners and family members of owners from these calculations, and that helps bring the average compensation number down to something more realistic, making farmers more eligible for this tax credit,” Baker says.

The Congressional Budget Office estimates that the tax credit will save small businesses $40 billion by 2019.

Eligibility. To be eligible for the tax credit, you must be a small employer as follows, says Paul Neiffer, a CPA with Hanson NvOPS, based out of Washington:
You employ on average fewer than 25 full-time equivalent employees during the year. The way to calculate this is to take your total paid employee hours (excluding the excess of any hours for employees who work more than 2,080 hours in the year) and then divide by 2,080 (number of hours in a 52-week, 40/week work year). If the number is less than 25, you qualify; if more than 25, you do not qualify, Neiffer says.

The average wage paid to your employees is less than $50,000/year.

The employer must pay the health insurance premiums under a “qualifying arrangement,” in which the employer pays at least 50% of the employee’s health insurance (assuming a single employee).

The amount of the premium that is eligible for the credit is based upon the actual premium paid by the employer, Neiffer adds. This amount is also subject to a cap based upon what the employer’s premiums would have been for the small group market for their state (or states). Also, if the employer pays 80% of the premium, then this cap is based upon 80% also.