What Expenses are Counted...

For years prior to 2014, only premiums paid to a health insurance issuer, such as an insurance company or HMO, for health care coverage are counted for purposes of the credit. Premiums for health care coverage that covers a wide variety of conditions, such as a major medical plan, are counted and premiums for certain coverage that is more limited in scope, such as limited scope dental or vision coverage, are also counted. However, if an employer offers more than one type of coverage, such as a major medical plan and a separate limited scope dental or vision plan, the employer must separately satisfy the requirements for a qualifying arrangement with respect to each type of coverage the employer offers (meaning the employer cannot aggregate these different plans for purposes of meeting the qualifying arrangement requirement). For a detailed description of the types of coverage that are counted for the credit, see section II.G of Notice 2010-44.

If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement, with employees paying the rest, the amount of premiums counted in calculating the credit is only the portion paid by the employer.

For example, if an employer pays 80 percent of the premiums for employees' coverage, with employees paying the other 20 percent, the 80 percent premium amount paid by the employer counts in calculating the credit. For purposes of the credit, including the 50-percent requirement, any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.

In addition, the amount of an employer's premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the state (or an area within the state) in which the employer offers coverage were substituted for the actual premium. For example, if an employer pays 80 percent of the premiums for coverage provided to employees and the employees pay the other 20 percent, the premium amount that counts for purposes of the credit is the lesser of 80 percent of the total actual premiums paid or 80 percent of the premiums that would have been paid for the coverage if the average premium for the small group market in the state were substituted for the actual premium. The average premium for the small group market does not apply separately to each type of coverage the employer offers, but rather provides an overall cap for all health insurance coverage provided by a qualified employer. See Q/A-4 for information on the average premium for the small group market in a state (or an area within the state).

Example 1.

(i) For the 2010 tax year, a qualified employer offers a health insurance plan with single and family coverage. Employer has 9 FTEs with average annual wages of $23,000 per FTE. Four employees are enrolled in single coverage and 5 are enrolled in family coverage.

(ii) The employer pays 50% of the premiums for all employees enrolled in single coverage and 50% of the premiums for all employees enrolled in family coverage and the employee is responsible for the remainder in each case. The premiums are $4,000 a year for single coverage and $10,000 a year for family coverage. The average premium for the small group market in the employer's state is $5,000 for single coverage and $12,000 for family coverage.

(iii) The employer's premium payments for each FTE ($2,000 for single coverage and $5,000 for family coverage) do not exceed 50% of the average premium for the small group market in the employer's state ($2,500 for single coverage and $6,000 for family coverage).

(iv) Thus, the amount of premiums paid by the employer for purposes of computing the credit equals $33,000 ((4 x $2,000) plus (5 x $5,000)).

Example 2:

(i) Same facts as in Example 1, except that the premiums are $6,000 for single coverage and $14,000 for family coverage.

(ii) The employer's premium payments for each employee ($3,000 for single coverage and $7,000 for family coverage) exceed 50% of the average premium for the small group market in the employer's state ($2,500 for single coverage and $6,000 for family coverage).

(iii) Thus, the amount of premiums paid by the employer for purposes of computing the credit equals $40,000 ((4 x $2,500) plus (5 x $6,000)).

Example 3.

(i) For the 2010 tax year, a qualified employer offers a major medical plan and a dental plan. The employer pays 50% of the premium cost for single coverage for all employees enrolled in the major medical plan and 50% of the premium cost for single coverage for all employees enrolled in the dental plan.

(ii) For purposes of calculating the credit, the employer can take into consideration the premiums paid by the employer for both the major medical plan and the dental plan, but only up to 50% of the amount of the average premium for single coverage for the small group market in the employer's State.

Example 4.

(i) Same facts as in Example 3, except that the employer pays 40% of the premium cost for single coverage for all employees enrolled in the dental plan.

(ii) For purposes of calculating the credit, the employer can take into consideration only the premiums paid by the employer for the major medical plan, and only up to 50% of the amount of the average premium for single coverage for the small group market in the employer's state. The employer cannot take into consideration premiums paid for the dental plan.