When the Patient Protection and Affordable Care Act (PPACA) became law in 2010, much attention was given to the Small Business Tax Credit.  Seen as in incentive to assist small business owners in complying with the new law, the intent was also to help more Americans purchase health insurance.

In summary, here is how it works:

Small Business Eligibility Criteria

  • Businesses must have fewer than 25 Full-Time Equivalent Employees (FTEs) for the applicable tax year.  To calculate what an FTE means under this provision of PPACA, the following assessment should  be used:
    • Each employee who works 2,080 hours (or more) annually should be counted as a FTE.
    • Add the hours for all employees who work part time, and add that total to the number of FTEs multiplied by 2,080.
    • Divide the total hours by 2,080, and round down to the next lowest whole number.
    • For example, a 20 person company, with 12 employees who work 2,080 hours per year, 3 who work 2,400 per year and 5 who work 1,000 per year would be calculated as follows:
      • 15 employees who work at least 2,080 per year x 2.080 = 31,200
      • 5 employees who work 1,000 per year = 5,000
      • (31,200 + 5,000) = 36,200.
      • 36,200/2,080 = 17.4
      • FTE = 17
      • The average annual wages paid must not exceed $50,000 per FTE.
      • The employer must pay a minimum of 50% of the premium for employee-only coverage afforded by a state licensed health insurance company.

Calculating the Tax Credit

  • The amount of the credit is based on a sliding scale formula, which is the sum of the following:
    • The credit amount multiplied by (FTEs-10)/15
    • The credit amount multiplied by the average annual wages ((AWW)-$25,000)/$25,000.
    • Using the above example, an assuming AWW of $35,000 per FTE, and an annual employer health insurance premium bill of $170,000, the credit is calculated as follows:
      • The tax credit (before deductions) is 50% (increased from 35% in 2013) times the annual premium:  50% x $170,000 = $85,000
      • Reduction for FTEs in excess of 10 is $39.666 ($85,000 x 7/15).
      • Reduction for AWW for FTEs in excess of $25,000 is $34,000 ($85,000 x  $10,000/$25,000).
      • The credit deduction is $39,666 + $34,000 = $73,666
      • The total employee tax credit is $85,000 – $73,666 = $11,334.

Other Considerations

  • Independent contractors, sole proprietors, family members and partners in the business are excluded from the calculation as are shareholders who own more than 2% of an S Corporation.
  • Special rules exist for seasonal employees who work fewer than four months during the year.
  • The credit is also limited by the average premiums in the small group market for the area in which the employee enrolls.
  • The credit is limited to two consecutive years.
  • Different rules apply for non-profit organizations.

And yes, there are many other rules to be considered, and seeking the advice of a qualified tax consultant is highly recommended.  For more information read the IRS publication Small Business Health Care Tax Credit Questions and Answers:  Calculating the Credit.

If you have any questions or would like to learn more about this topic, please reach out to Genesis HR Solutions at AskUs@genesishrsolutions.com or 800-367-8367.

Genesis HR Solutions is the premier PEO provider for Massachusetts based businesses.