By Andrew Cook, Senior Associate

With the passage of the Affordable Care Act, there is more incentive than ever for companies to provide health insurance to their employees. This can be a significant addition to your small business’ expenses, but the IRS is willing to provide some relief if you purchase insurance through a government-approved Small Business Health Options Program, or SHOP.  If your health insurance plan qualifies, you may be able to claim the credit for Small Employer Health Insurance Premiums and receive a tax benefit for the plan’s first two consecutive years.

To see if your business qualifies for the credit, there are three conditions that must be satisfied:

  • The healthcare plan must be a “qualifying arrangement.” Generally, an arrangement qualifies if it requires your company to pay at least 50% of the premium cost for each enrolled employee’s healthcare coverage. However, there are many exceptions to this rule, and it would be wise to consult with an expert to see if your plan qualifies.
  • Your business must have fewer than 25 full-time equivalent employees during the year. This limit does not count the business’ owners, or “seasonal” employees who work for 120 or fewer days. The credit counts 2,080 hours of labor as one full-time employee, so two employees who worked 1,040 hours each would only count as one full-time employee for the purposes of the credit.
  • Your business must pay average annual wages of less than $52,000 per full-time equivalent employee. To figure this amount, divide the total employee wages paid by the number of full-time equivalent employees. As with the above example, two employees working 1,040 hours each would only count as one employee in the denominator.

If your company meets these conditions, then it is eligible to claim a credit on Form 8941. The amount of the credit is 50% of the lesser of two amounts: (1) the premiums actually paid by the company, or (2) the average premium for your local insurance market. You can look up the second amount in the IRS instructions for Form 8941.

Unfortunately, the full 50% credit amount is only available if your company has 10 or fewer employees and no more than $25,000 of average wages. The benefit gradually decreases as the number of employees or average wage rises. However, if you are already paying for health insurance, then any amount of tax credit is still a welcome bonus.

C Corporations take the credit amount against their federal tax liability, but ‘passthrough entities,’ such as partnerships and S Corporations, do not directly benefit from this tax credit. Instead, each person who owns part of the business reports a share of the credit on his or her individual return. The credit is nonrefundable so you cannot receive a refund if your tax liability is already zero. However, it can be carried back by one year or forward up to 20 years, which can help reduce a future tax liability.

In many cases, the most significant hurdle is not filling out the form itself, but the record-keeping to support it. It is important to note that the incoming Trump administration may work to repeal the Affordable Care Act so consult with a CPA at the beginning of the tax year to determine if your business can qualify, then you must keep track of each employee’s hours and wages throughout the year. Fortunately, if the process is done properly, you could reap a tidy tax benefit at tax time.

---

The information contained in the Knowledge Center is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will CST or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Knowledge Center or for any consequential, special or similar damages, even if advised of the possibility of such damages.