If you are eligible for the small business tax credit, be sure you are on the right plan.

Are you eligible for a small business tax credit? Time is running out for 2014.

On June 30, 2014, the Internal Revenue Service (IRS) issued a final rule on the employer health care tax credit. This new rule applies for taxable years beginning after 2013 and before 2015.

To be eligible, an employer must:

  1. have fewer than 25 full-time equivalent employees (FTEs)
  2. pay average annual wages of less than $50,800 per FTE (not including owners/family)
  3. maintain a “qualifying arrangement” whereas the employer pays premiums for each employee enrolled in its health insurance plan in an amount equal to a uniform percentage of not less than 50% of the premium cost of the coverage.

Here’s where it gets sticky – beginning with the 2014 taxable year, a qualifying arrangement is one where the employer is required to pay a uniform percentage not less than 50% of the premium cost of a qualified health plan (QHP) through an Exchange’s Small Business Health Options Program (SHOP). That means that in 2014, an employer must purchase health insurance coverage for their employees through a SHOP to be eligible for the tax credit. In Oregon, because the SHOP is not operable through the Exchange, an employer can purchase a Certified Qualified Health Plans QHP directly from an insurer, agent or broker.

The IRS recognized that the employer’s plan year may begin on a date other than the first day of it’s taxable year so there is a transition rule in place:

  • As of Aug. 26, 2013, offers coverage in a plan year that begins on a date other than the first day of its taxable year;
  • Offers coverage during the period before the first day of the plan year beginning in 2014 that would have qualified the employer for the health care tax credit under the rules that apply to periods before Jan. 1, 2014; and
  • Begins offering coverage through a SHOP Exchange as of the first day of the plan year that begins in 2014.

If an employer satisfied the criteria for the transition rule, it will be treated as offering coverage through SHOP for the entire 2014 taxable year for purposes of determining eligibility for the health care tax credit and calculating the credit.

The amount of the tax credit will be based on certain criteria. For the 2010 through 2013 tax years, the maximum credit is 35 percent of premiums paid for taxable small employers and 25 percent of premiums paid for tax-exempt small employers. In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payment the employer would have made under the same arrangement if the average premium for the small group market in the employer’s geographic location were substituted for the actual premium. For 2014 and later taxable years, the maximum credit increases to 50 percent of premiums paid for taxable small employers and 35 percent of premiums paid for tax-exempt small employers. It is advised to see your tax accountant based on your unique business situation.

For now, the tax credit is available to eligible small employers that use the direct enrollment process. To be eligible for the tax credit for 2014, small employers must receive an eligibility determination from the SHOP by completing a paper application (available on www.healthCare.gov). The agent, broker or insurer can help employers complete this form. The SHOP will send the employer an eligibility determination after it receives a completed application. The SHOP will also send employee enrollment information to the IRS to ensure that, if otherwise eligible, the employer can claim the tax credit for tax year 2014. Employers must apply and be determined eligible prior to filing their taxes and seeking the health care tax credit.

To learn about additional transition relief in specific counties, you can review this updated release on January 6, 2014, IRS Notice 2014-6.

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