The Small Employer Health Insurance Tax Credit provides eligible small employers with an income-tax credit to help pay for health insurance coverage they offer their employees. A "small employer" is defined as having 25 or fewer full-time (or full-time equivalent) employees and average annual wages totaling no more than $50,000 per employee.

Full-Time Equivalent Employees

For this purpose, the number of full-time equivalent employees is determined by dividing:

• The total number of hours of service (up to 2,080 per employee) for which wages were paid by the employer to employees during the taxable year, by
• 2,080.

Seasonal workers may be excluded from the calculation.  Self-employed individuals and their wages are not taken into account.

Amount of the Credit

The tax credit is available in two stages:

• Stage 1 (tax years 2010 through 2013): Employers providing at least 50% of the total premium cost towards their employees' coverage may be eligible for a tax credit up to 35% of the lesser of (A) the amount the employer actually pays, or (B) the amount the employer would have paid if the employees were enrolled in a plan with a premium equal to the average premium for the small group market in the state where the employer offers coverage.  (See IRS Revenue Ruling 2010-13 for more information.)
• Stage 2 (starting in tax year 2014): Employers providing coverage through a state-based Exchange and contributing at least 50% of the total premium cost towards their employees’ coverage may be eligible for a tax credit up to 50% of the lesser of (A) the amount the employer actually pays, or (B) the amount the employer would have paid if the employees were enrolled in a plan with a premium equal to the average premium for the small group market in the rating area where the employee enrolls for coverage (the rating areas will be determined by HHS).  The tax credit will only be available for the first two years of Exchange coverage.

Limitations on the Credit

Small employers with 10 or fewer employees and average annual wages totaling less than $25,000 are eligible for a full credit in Stages 1 and 2. The credit is phased down for small employers with between 10 and 25 full-time (or full-time equivalent) employees and for small employers with average annual wages between $25,000 and $50,000. Tax-exempt organizations are eligible for a partial tax credit (25% during Stage 1 and 35% during Stage 2).

American Fidelity Assurance Company does not provide tax or legal advice.