Accounting for Health Insurance Premiums

At this point in the year, many of you are now familiar with the Small Business Health Care Tax Credit.  If you qualified for the credit for 2010, you likely witnessed first hand all the extra information that is required for the credit calculation.  Below is an except from our recent newsletter on the tax credit.

Health Insurance Premium Bookkeeping
Much of the tax credit calculation revolves around eligible employee hours and wages; however, once an employer is determined to be eligible for the credit, much more information is needed with regards to the employer’s health insurance premiums.  Fortunately, a few simple procedural bookkeeping changes can greatly simplify this portion of the calculation:

  • Classification of owner and family member insurance – when posting health and dental insurance premium payments, make sure premiums for owners and their family members are posted to a separate sub-account of employee benefits.  These premiums are not included in the calculation, so it is important that they be separated.
  • Premiums for seasonal workers – even though it is important to classify seasonal worker wages and hours separately from eligible employees, their premiums are actually included in the calculation, so make sure their premiums are included with those for eligible employees.
  • Record coverage information in books – in order to finish the calculation, you have to report the type of coverage (single or family) and the number of employees with each coverage type.  To simplify this final step, be sure to note this information in the “memo” field in your books when recording the premium payment.  Typically, this information is provided on the bill from the insurance company, and it is much easier to record this each month than pull all the bills at year end.

For general information on the Small Business Health Care Tax Credit, refer to our post from last year.

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Small Business Health Care Tax Credit

With all the new incentives out there for employers and recent tax law changes, most small business owners are likely feeling a little overwhelmed.  Between the COBRA subsidy, the HIRE act, and the new incentives & changes from the Health Care Reform Act – being an employer has become much more complicated.  In fact, if you are not keeping up on the changes and planning ahead – you could be missing out some credits and incentives that are available to your business.

One of the specific credits from the Health Care Reform Act that requires some current planning in 2010 is the Small Business Health Care Tax Credit, which is a 35% tax credit based on premiums paid to cover employees.  As the name suggests, you have to be a small business – one with fewer than 25 full-time employee equivalents (FTEs).  In addition, you have to pay average annual wages below $50,000 per FTE.  Lastly, as the employer, you have to pay health insurance premiums under a “qualifying arrangement”, which in simple terms means you pay a uniform percentage of not less than 50% of the premium cost of coverage for each enrolled employee.

I probably lost many business owners right there; however, after reading the fine print in the law you may find that you qualify after all.  The most important fine print: wages paid to business owners or their family members are not included in calculating the average wages or the number of employees.  This is very good news for corporations as the shareholder wages would have likely made most ineligible for the credit right off the bat.  This could work out well for small, family-owned businesses that provides health insurance and employs a number of non-family employees.

Then we hit the final hurdle – as an employer, do you pay at least 50% of the premium cost of coverage for all your employees?  Even if you do not pay a full 50% or even provide this employee benefit at all, you should at least run the calculation to see what your potential benefit would be.  It may be worth looking into.  Not only do you get a tax credit, but in this economy, such an employee benefit could be given in lieu of pay increases.

To calculate you potential tax credit, check out the calculator at smallbusinessmajority.org.

More detailed information on the tax credit:
IRS Q&A Page on the Small Business Health Care Tax Credit
White House Summary & Fact Sheet