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Examples

These examples are provided to assist you to understand how the credit works.

Example One

A small employer with 10 employees:

  • Tax year: 2015
  • Employer's share of total premiums: $37,500
  • State subsidies and tax credits: $0
  • Tax exempt employer: No
  • Employees who worked at least 2,080 hours: 15
  • Part time hours: 0
  • Total wages paid: $312,000
  • Plan Offered to employees:
    • Name: Plan A
    • Offered in Dunklin county, Missouri
    • Annual cost of Self: $5,000 and the employer pays $2,500. (Plan only offers self)
    • All 15 employees are enrolled in self-only coverage

This employer may be eligible for a credit of $12,500. The employer's maximum credit would by $18,750 (50 percent of $37,500). However, the employer has 15 full time equivalent employees and average wages of $20,000, so there is a full-time equivalent employee phaseout of $6,250 but no annual average wage phaseout. The full-time equivalent employee phaseout is subtracted from the maximum credit.

Example Two

A small employer with 10 employees – but each is part-time working 128 hours each month.

  • Tax year: 2016
  • Employer's expected share of total premiums: $20,000
  • State subsidies and tax credits: $0
  • Tax exempt employer: No
  • Employees who worked at least 2,080 hours: 0
  • Part time hours: 15,360 hours
  • Total wages paid: $230,400
  • Plan Offered to employees
    • Name: Plan A
    • Offered in Yellowstone county, Montana
    • Annual cost of Self: $4,000 and the employer pays $2,000. (Plan only offers self)
    • All 10 employees are enrolled in self-only coverage

This employer has 7 full time equivalents for purposes of the credit. This employer may be eligible for a credit of approximately $7,200 after an estimated wage phaseout of $2,800 because the average wages were $32,000.

Because the employer is planning ahead for 2016, neither the average premium limitation nor the inflation adjusted wage limits are available. The wage phaseout is estimated using the limits for 2010 – 2013 ($25,000 - $50,000).

KEY TERMS

Eligible Employees

In general, all employees who perform services for you during the tax year are taken into account in determining your FTEs, average annual wages, and premiums paid.

You can generally calculate your FTEs by adding up the hours of service for all of your employees and then dividing that by 2,080 (which is a full time employee - 40 hours a week at 52 weeks per year).

Former Employees

Premiums paid on behalf of a former employee with no hours of service may be treated as paid on behalf of an employee for purposes of figuring the credit provided that, if so treated, the former employee is also treated as an employee for purposes of the uniform percentage requirement.

Leased Employees

Do not use premiums paid by the leasing organization to figure your credit. Also, a leased employee who is not a common law employee is considered an employee for credit purposes if he or she does all the following:

  • Provides services to you under an agreement between you and a leasing organization,
  • Has performed services for you (or for you and a related person) substantially full time for at least 1 year, and
  • Performs services under your primary direction or control.

But do not use hours, wages, or premiums paid with respect to the initial year of service on which leased employee status is based.

Seasonal Employees

Employees who perform labor or services on a seasonal basis and perform labor or services for you 120 or fewer days during the tax year are not considered employees in determining FTEs and average annual wages. But premiums paid on their behalf are counted in determining the amount of the credit.

Seasonal workers include retail workers employed exclusively during holiday seasons. Seasonal workers also include workers employed exclusively during the summer.

Household and Other Nonbusiness Employees

Household employees and other employees who are not performing services in your trade or business are considered employees if they otherwise qualify as discussed above. A sole proprietor must include both business and nonbusiness employees to determine FTEs, average annual wages, and premiums paid.

Ministers

A minister performing services in the exercise of his or her ministry is treated as self-employed for Social Security and Medicare purposes.

However, for credit purposes, whether a minister is an employee or self-employed is determined under the common law test for determining worker status. Self-employed ministers are not considered employees.

Excluded Employees

The following individuals are not considered employees when you figure this credit. Hours and wages of these employees and premiums paid for them are not counted when you figure your credit.

  • The owner of a sole proprietorship.
  • A partner in a partnership.
  • A shareholder who owns (after applying the section 318 constructive ownership rules) more than 2% of an S corporation.
  • A shareholder who owns (after applying the section 318 constructive ownership rules) more than 5% of the outstanding stock or stock possessing more than 5% of the total combined voting power of all stock of a corporation that is not an S corporation.
  • A person who owns more than 5% of the capital or profits interest in any other business that is not a corporation.
  • Family members or a member of the household who is not a family member but qualifies as a dependent on the individual income tax return of a person listed above. Family members include:
    • A child (or descendant of a child),
    • A sibling or step-sibling,
    • A parent (or ancestor of a parent),
    • A step-parent,
    • A niece or nephew,
    • An aunt or uncle,
    • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
    A spouse is also considered a family member for this purpose.

Eligible Tax Exempt Employers

A tax-exempt small employer is an eligible small employer described in section 501(c) that is exempt from taxation under section 501(a). A tax-exempt employer not described in section 501(c) is generally not eligible to claim this credit. However, a tax-exempt farmers' cooperative subject to tax under section 1381 may be able to claim it as a general business credit.

Hours of Service

Count both the time your employees worked for you and for the time that you paid (and were supposed to pay) them for time off, such as vacation, holidays, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.

Also, if any of your employees took more than 160 hours of continuous paid time off (as described above) you only need to count the first 160 hours. If your employees have more than 2,080 hours, only count the first 2,080.

Net Premium Payments

In the case of an employer receiving a State tax credit or State subsidy for providing health insurance to its employees, net premium payments are the excess of the employer’s actual premium payments over the State tax credit or State subsidy received by the employer.

In the case of a State payment directly to an insurance company (or another entity licensed under State law to engage in the business of insurance), the employer’s net premium payments are the employer’s actual premium payments.

If a State-administered program (such as Medicaid or another program that makes payments directly to a health care provider or insurance company on behalf of individuals and their families who meet certain eligibility guidelines) makes payments that are not contingent on the maintenance of an employer-provided group health plan, those payments are not taken into account in determining the employer’s net premium payments.

Payroll Tax Limitation for Tax-Exempt Small Employers

If you are an eligible tax-exempt employer, your credit cannot exceed the amount of certain payroll taxes. Payroll taxes, for this purpose, mean only the following:

  • Federal income taxes and Medicare taxes you were required to withhold from employees’ wages during the calendar year.
  • Medicare taxes you were required to pay for the calendar year.

State

The state is where your employee is enrolled in coverage. It is used in determining whether the State Average Premium Limitation applies.

State Average Premium Limitation

The amount of your premium payments that are taken into account in calculating the credit is limited to those you would have made under the same arrangement if the average premium for the small group market in the rating area in which your employees enroll for coverage were substituted for the actual premium.

State Subsidies and Tax Credits

Your credit may be reduced if you are entitled to a state tax credit or a state premium subsidy for the cost of health insurance coverage you provide under a qualifying arrangement to individuals considered employees. The state tax credit may be refundable or nonrefundable and the state premium subsidy may be paid to you or directly to your insurance provider.

Although a state tax credit or premium subsidy paid directly to you does not reduce the amount of your employer premiums paid, and although a state premium subsidy paid directly to an insurance provider is treated as an employer premium you paid, the amount of your credit cannot be more than your net premium payments. Net premium payments are employer premiums paid minus the amount of any state tax credits you received or will receive and any state premium subsides paid either to you or directly to your insurance provider for premiums for health insurance coverage you provide under a qualifying arrangement to individuals considered employees.

Total Wages

Wages, for this purpose, mean wages subject to Social Security and Medicare tax withholding determined without considering any wage base limit. If an individual is not considered an employee or is an excluded employee, his or her wages do not count. This includes:

  • Wages paid to any seasonal employees who worked 120 or fewer days during the tax year; and
  • Wages paid with respect to the initial year of service on which leased employee status is based.

Wages or compensation paid to ministers who are common-law employees for duties performed in the exercise of their ministry are not subject to FICA taxes and are not wages as defined in § 3121(a). So the wages of a minister who is a common law employee are not taken into account.

Short Taxable Year If an employer has a short taxable year, wages must be pro-rated (or annualized) in calculating the credit. For example, if a small employer has been in business (and paying premiums) for 6 months during its first taxable year, it must pro-rate the wages earned to reflect the 6 months the employer has been in operation.