The IRS has provided additional information on the tax credit for small businesses that provide health insurance to their employees. The IRS has elaborated on provisions of the small business health care credit with an FAQ; a 3 Step Chart to determine eligiblity; and examples of credit calculations.
The answers to questions #6 and # 7 in the FAQ seem to be the most helpful for a business owner or accountant trying to determine the amount of credit available. While I’m not an accountant and don’t give tax advice, here is my understanding of how the credit calculation works: 1) determine the full credit available as if your company had 10 employees and an average wage of $25,000/year/employee; then, 2) calculate the percentage difference your specific number of employees and average wages vary from the maximum available credit which is with 10 EEs and an average wage of $25,000/year.
The greater number of employees a company has above 10 EEs and the higher the average salary above $25,000/ee (or “full time equivalent” FTE) the less the tax subsidy.
Also, question #20 tells us that the health insurance premium deduction that small businesses get will be reduced by the amount of the tax credit. Specifically question #20 says “Does taking the credit affect an employer’s deduction for health insurance premiums?
A. Yes. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.”
The IRS also limits the amount that qualifies as EE health insurance premium. The government does not want employers to purchase richer benefit (more expensive coverage) for EEs so that they will get a larger tax subsidy. To prevent against this the IRS has guidelines which show the maximum allowable health insurance premium for an employee and employee plus one or more dependents.
The “average premium for small group market” health insurance in California is $4,628/year for employee only coverage and $10,957/year for an employee plus one or more dependents. This is the maximum amount allowed for the tax credit calculation in California. If an employer actually pays less than this average amount for employee health insurance, they use the lesser amount.
Interestingly, California is the 16th least expensive state for small group health insurance, according to this list. That’s pretty amazing when you consider that the cost of housing/living/etc. in California is usually the highest in the country. Even more interesting is that the most expensive state on the list is Massachusetts with average cost per employee at $5,700/yr. and $14,138/yr. for employee plus one or more. This is 23% higher than California. If you recall, many proponents of federal health insurance reform pointed to Massachuusetts as the model for the country. If so, get ready to pay more for health insurance.