Obamacare’s insurance and benefits will certainly bring a number of changes to the way small business owners handle their businesses and health insurance. With this in mind, it is important to do your due diligence and understand the limitations on any credits you can receive as a small business owner. This is especially important in California, where laws on running businesses vary differently from other states.
Average Health Insurance Premiums for Small Business
As we discussed in our blog post about qualifying arrangements, the amount of credit a business owner can receive under qualifying arrangements is limited by three factors, one of which is what the average premiums are for the small market group (small business) in a particular state. For our example, we will refer to California.
According to the IRS, your credit is lowered if the employer premiums paid are more than the employer premiums that would have been paid if those considered employees enrolled in a plan with a premium equal to the average premium for the small group market in the specific state where the employee works.
The amount of premium payments is limited to the smaller of:
- The average premium for the small group market in California
- The amount the business owner has actually paid
The Department of Health and Human Services (HHS) determines the average premium in the small market group for each state. Refer to IRS Form 8941-2012 for specific amounts in each state (for California, the amount for employee only coverage is $4,999, family coverage is $12,161).
Example for a California Business
You operate a business in California with eight full time employees. Their average salary is $24,000 per FTE. Four of your employees are enrolled in single-coverage insurance and the other four have family coverage.
For all, you pay 50% of the premiums. Total premiums are $3,000 for single coverage (you pay $1,500), and $8,000 for family coverage (you pay $1,500 of employee only premium).
Due to the equality and percentage of payments you make, you qualify for a credit on the premiums. However, you need to determine the amounts of the premiums that qualify for the credit. In order to do that, compare the amount you paid against the average premium for the small group market in California.
The average premium for single coverage in California is $4,999 – so because you are paying 50% of the employee only premium, the limit is based on 50% of the start market premiums, so in this case it would be $2,499.50 for employee only coverage.
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