State Credits and State Subsidies for Health Insurance...

Q.  What effect do state credits and state subsidies for health insurance have on the amount of the Federal health care tax credit?

1. Some states offer tax credits or a premium subsidy to certain small employers that provide health insurance to their employees. Generally, the premium subsidy is provided in the form of payments made either directly to the employer or to the employer's insurance company. If an employer is entitled to a state tax credit (whether refundable or nonrefundable) or a premium subsidy that is paid directly to the employer, the premium payment made by the employer is not reduced by the state credit or subsidy for purposes of determining whether the employer has satisfied the qualifying arrangement requirement to pay an amount equal to a uniform percentage (not less than 50 percent) of the premium cost. Also, except as described below in this Q/A-9, the maximum amount of the federal health care tax credit is not reduced by reason of a State tax credit (whether refundable or nonrefundable) or by reason of payments by a state directly to an employer.

Generally, if a state makes payments directly to an insurance company to pay a portion of the premium for coverage of an employee under employer-provided health insurance (state direct payments), the state is treated as making these payments on behalf of the employer for purposes of determining whether the employer has satisfied the qualifying arrangement requirement to pay an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of coverage. Also, except as described below in this Q/A-9, these premium payments by the state are treated as an employer contribution for purposes of calculating the federal health care tax credit.

Although state tax credits and payments to an employer generally do not reduce an employer's otherwise applicable federal health care tax credit, and although state direct payments are generally treated as paid on behalf of an employer, the federal health care tax credit cannot exceed the amount of the employer's net premium payments. In the case of a state tax credit for an employer or a state subsidy paid directly to an employer, the employer's net premium payments are calculated by subtracting the state tax credit or subsidy from the employer's actual premium payments. In the case of a state direct payment, 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 Federal health care tax credit.

Example 8.

1. Employer's state provides a health insurance premium subsidy of up to 40% of the health insurance premiums for each eligible employee. The state pays the subsidy directly to the employer.
2. Employer has one employee, Employee D. Employee D's health insurance premiums are $100 per month and are paid as follows: $80 by the employer and $20 by Employee D through salary reductions to a cafeteria plan. The state pays employer $40 per month as a subsidy for employer's payment of insurance premiums on behalf of Employee D. Employer is otherwise a qualified employer that meets the requirements for the federal health care tax credit.
3. For purposes of the requirements for a qualifying arrangement, and for purposes of calculating the amount of the federal health care tax credit, the amount of premiums paid by the employer is $80 per month (the premium payment by the employer without regard to the subsidy from the state).

Example 9.

1. Employer's state provides a health insurance premium subsidy of up to 50% for each eligible employee. The state pays the premium directly to the employer's health insurance provider.
2. The employer has one employee. The employee is enrolled in single coverage under the employer's health insurance plan.
3. The employee's health insurance premiums are $100 per month and are paid as follows: $30 by the employer; $50 by the State and $20 by the employee. The state pays the $50 per month directly to the insurance company and the insurance company bills the employer for the employer and employee's share, which equal $50 per month. The employer is otherwise a qualified employer that meets the requirements for the federal health care tax credit.
4. For purposes of the requirements for a qualifying arrangement, and for purposes of calculating the amount of the federal health care tax credit, the amount of premiums paid by the employer is $80 per month (the sum of the employer's payment and the state's payment).

Example 10.

1. Employer's state provides a health insurance premium subsidy of up to 50% for each eligible employee. The state pays the premium directly to the employer's health insurance provider. Employer has one employee. The employee is enrolled in single coverage under employer's health insurance plan. The employee's health insurance premiums are $100 per month and are paid as follows: $20 by the employer; $50 by the state and $30 by the employee. The state pays the $50 per month directly to the insurance company and the insurance company bills the employer for the employer's and employee's shares, which total $50 per month. The employer is otherwise a qualified employer that meets the requirements for the federal health care tax credit.
2. The amount of premiums paid by the employer for purposes of determining whether the employer meets the qualifying arrangement requirement (the sum of the employer's payment and the state's payment) is $70 per month, which is more than 50% of the $100 monthly premium payment. The amount of the premium for calculating the maximum federal health care tax credit is also $70 per month. The maximum credit is $24.50 ($70 x 35%).
3. The employer's net premium payment is $20 (the amount actually paid by the employer excluding the state subsidy). After applying the limit for the employer's net premium payment, the federal health care tax credit is $20 per month, (the lesser of $24.50 or $20).