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Tax Tip: The Small Employer Health Insurance Tax Credit

Posted: November 25, 2013, 9:30 a.m. EDT


By Mark E. Battersby

For many businesses, offering health insurance is critical to attracting the kinds of workers necessary for success. Fortunately, whether a pet retailer presently offers health insurance or is merely considering offering it, there is a sliver of a silver lining in the form of a unique, often-overlooked tax credit for small employers.

Any pet dealer or business that provides healthcare coverage is eligible for the Small Employer Health Insurance Tax Credit if, for the tax year, it employs 25 or fewer full-time equivalent (FTE) staff members who are paid an average annual salary of less than $50,000. The tax credits are higher the lower the average salary and the fewer FTEs the business has.

While any qualifying pet retailer is eligible for this credit, it works on a sliding scale and is targeted specifically for those businesses with low- and moderate-income workers.

To take advantage of this tax credit, small employers (those with 25 or fewer FTE employees) must have an arrangement through which the retailer can make a contribution on behalf of each employee who enrolls in the employer’s qualified health plan (QHP).

The contribution amount must be at least 50 percent of the QHP’s premium cost. In addition, the average annual wages of the employer’s FTEs cannot currently exceed $50,000. Through 2013, the maximum credit is 35 percent of premiums paid by small business employers. For tax years beginning in 2014 or later, the maximum credit will increase to 50 percent of premiums paid by employers.

The IRS has stated that certain higher-income individuals, specifically sole proprietors, partners in partnerships or shareholders owning more than 2 percent of the stock in an S corporation, and any owners with more than a 5 percent interest in other businesses, do not have to be counted as employees when calculating the average wage. And, while the tax law does not specifically refer to spouses, according to the IRS, spouses are nevertheless excluded from the definition of employee.

The IRS’ proposed guidelines also contain transition rules if an eligible small employer’s plan year begins on a date other than the first day of its taxable year. As about 30 percent of employers in the small group market don’t have healthcare plans that run on a calendar year, the new rules mean premiums paid by the retailer under their old plans as well as what they are paying when they switch to the exchange will be eligible for the tax credit.

What’s more, all qualifying manufacturers, distributors, retailers, breeders, groomers and other pet services businesses are eligible to buy health insurance on a special exchange known as the Small Business Health Options Program (SHOP). Naturally, in order to fully understand all of the pros and cons of the Small Employer Health Insurance Tax Credit, professional assistance is strongly recommended.

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