Are You Eligible for the Small Business Health Care Tax Credit?

Health insurance coverage is a critical part of employee recruitment and retention, but it can seem cost-prohibitive for some community association management firms. The Small Business Health Care Tax Credit might make it far more affordable than you realize, though.

The credit could be worth as much as 50 percent of the insurance premiums you pay for employee’s health insurance. And tax credits are more valuable than the business expense deduction alternatively available for insurance costs because they provide dollar-for-dollar tax savings — as opposed to merely reducing taxable income.

Here’s what you need to know about the credit.

The Tough Labor Market

“We’re still in the ‘employee’ market, where candidates have the upper hand,” says Jamie Dokovna, a shareholder in the Florida law firm Becker & Poliakoff who practices employment law and works in the community association arena.

“I hear routinely that employers have to be a lot more competitive than they have in the past. Positions go unfilled longer.”

Dokovna says an employer’s benefit package is critical, regardless of the employer’s size: “There’s no legal requirement for smaller employers to offer health insurance and other benefits, but it’s become a necessity to compete with bigger employers.

“If someone is choosing between a job that may pay a dollar or two more per hour versus one that has health insurance, especially if they have a family, the job with insurance can be more attractive.”

Dokovna has seen this exact scenario play out.

“I just had a client that was going to offer a prospect a lower hourly rate than another potential employer was going to pay,” she says. “But my client had benefits, and the applicant had indicated insurance was something that was very important to him.” Her client landed the applicant.

Dokovna regularly advises clients that want to remain competitive to look into the credit. “It’s an option for smaller employers that could help,” she says.

Do You Qualify?

To qualify for the credit, you must satisfy four requirements:

1. You have fewer than 25 full-time equivalent employees. A full-time equivalent generally equals 2,080 hours per year (or 52 weeks of 40 hours) for purposes of the credit. Because this requirement considers full-time equivalents, rather than your actual number of employees, you could meet it even if you have 25 or more employees if some of them work part-time. For example, you can meet it if you have 48 half-time workers.

Seasonal workers who work 120 or fewer days don’t count toward the limit. You can, however count the premiums you pay for their health insurance when you determine the amount of your credit (see below).

2. The average annual employee salary is less than $56,000. The maximum annual salary is adjusted annually for inflation. You compute your average annual salary by 1) dividing your total annual wages paid by the number of full-time equivalents, and 2) rounding down to the nearest $1,000. For example, $39,950 is rounded down to $39,000.

3. You pay at least 50 percent of your full-time employees’ premiums. Your premium payments must be part of what’s called a “qualifying arrangement.” That’s an arrangement that requires you to pay a uniform percentage of at least 50 percent of the premium for each enrolled full-time employee’s coverage (a full-time employee is one who works 30 or more hours per week).

4. You offer all full-time employees coverage through the Small Business Health Options Program Marketplace (SHOP). SHOP is the federal government’s health insurance marketplace for employers with up to 50 employees.

How Much Can You Get?

Your credit amount is based only on the premiums you pay under the qualifying arrangement (for both employees and their dependents). So, if you paid only 60 percent of the cost, only that amount is considered when calculating your credit.

Any state premium subsidies or tax credits you receive for health insurance won’t reduce the amount of premiums you can include. But your credit can’t exceed your net premium payments, meaning the premiums paid less the amount of any state tax credits or subsidies.

The credit is computed on a sliding scale, with bigger credits going to smaller employers. The highest is for companies with fewer than 10 employees who are paid an average of $27,000 or less. You can estimate your credit amount with the federal government’s online estimator.

How Can You Claim the Credit?

You can claim the credit for only two consecutive tax years, as part of the general business credit on your IRS Form 3800. You’ll have to reduce your deduction for health insurance expenses by the amount of your credit.

You can claim the credit against either your regular income or alternative minimum tax. If your credit amount is more than your tax liability, you can carry the excess back or forward to other tax years.  You also can claim a business expense deduction for the amount that your premium costs exceed your maximum allowable tax credit for a tax year.

Is It Right for You?

The credit might help you provide health insurance, but the math doesn’t always work out.

“You need to speak with your accountant, who can give you an accurate assessment of what the benefit will be for you,” Dokovna says. “The tax advantage could be disproportionate to the cost.”