What small business owners need to know about health insurance

Your small business is suddenly thriving because you and your team are truly good at what you do. To keep your employees happy and productive, and because you care about them, you have decided to offer a group health insurance plan. This is amazing. Even better, your business can receive a small business health insurance tax credit under the Affordable Care Act, which can help offset some of the cost of a group health plan—at least for a while. What it is and how it works, the publication told Ramsey Solutions.

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What is the Small Business Health Insurance Tax Credit?

The Small Business Health Insurance Tax Credit reduces the amount of taxes a small business must pay when it first provides health insurance to its employees through the HealthCare.gov Small Business Health Options Program (SHOP). The tax credit is up to 50% of premiums for small companies or up to 35% for small employers that do not pay taxes.

Qualifying businesses can claim the Small Business Health Insurance Tax Credit for two consecutive years, and that's it. This is because this benefit is designed to give small employers some time to figure out how to pay for health insurance coverage under the Affordable Care Act.

That is, a small entrepreneur gets two years to figure out how to fit health insurance for their employees into the budget. The loan gives companies some cushion as they decide how to offer health insurance to employees.

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If you are a small business looking to offer a group health plan and take advantage of the Small Business Health Insurance Tax Credit, contact one of your local independent insurance providers to help you navigate the plans offered at SHOP.

Who is eligible for the Small Business Health Insurance Tax Credit?

The Internal Revenue Service (IRS) has listed three requirements that a business must meet to qualify for the benefit:

1. You must pay your employee health insurance premiums as agreed. What does this mean? Typically, this means you must pay at least 50% of each employee's health insurance costs. However, this percentage does not apply to dependents, so if you contribute less than 50% of the contributions to cover the expenses of the rest of the employee's family, you can still claim a deduction for those contributions.

2. You must have up to 25 full-time employees (FTE) during the tax year. When the IRS says “small business,” it means small businesses. And if your business only employs part-time employees, the IRS has a very simple formula for calculating FTE.

The IRS considers FTE an employee who works 2080 hours per year. This is calculated based on a full-time person working eight hours a day, five days a week, for 52 weeks. Do the math and you get 2080 hours.

The IRS allows hours worked by part-time employees to be combined into FTE. Both full-time and part-time employees can be included in the equation. If the total number of FTE employees does not exceed 25, you may qualify for a tax deduction.

3. The average annual salary of these full-time employees cannot exceed $54 (this figure is indexed for inflation and changes from year to year). The full 50 percent credit is available to full-time employees earning $26 annually, and the percentage decreases as salary increases.

Additionally, you should check the average health insurance premiums in each county and make sure the average annual premiums you pay are below that amount.

How to Get a Small Business Health Insurance Tax Credit

So, once you've decided to offer your employees a group health insurance plan, you can calculate and apply for benefits using IRS Form 8941.

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The form instructions include a handy table where you can list your employees, the total number of hours they worked in the tax year, and the amount you paid them. It's very handy in that it's numbered from 1 to 25, which is a helpful reminder that you can't have more than 25 FTE. If you have more than 25 part-time workers, you will have to use a separate sheet. Remember that the combination of part-time workers cannot exceed 25 FTE.

And one last thing. Employee wages and benefits, including the cost of health insurance plans, are a common tax deduction for small businesses. However, during the two years that you receive the Small Business Health Insurance Tax Credit, you must subtract the amount you claim as a credit from the amount you claim as a tax credit. After two years, return to claim a deduction for the entire amount spent on employee health insurance.

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