Deductions for Small Business Health Premiums

Beginning on 2009 returns, Alabama allows an enhanced deduction for small business health insurance premiums.  The deduction is allowed for qualifying employers (those with less than 25 employees) and their qualified employees.  Qualified employees are defined as an employee who earns no more than $50,000 of wages and reports no more than $75,000 ($150,000 for married filing a joint return) of Alabama adjusted gross income.

Qualified employees can receive, on their Alabama tax return, an “above the line” deduction for 50% of the health insurance premiums they pay as a part of their employer provided health plan.  The deduction is allowed regardless of whether the employee itemizes deductions or claims the standard deduction on the return.  The deduction is allowed even if the premiums are paid with pre-tax dollars through a cafeteria plan.

Qualified employers may deduct as a business expense on their Alabama tax return, 50% of the health insurance premiums paid on behalf of qualified employees through the employer provided health insurance plan.  The 50% deduction is in addition to the normal business expense deduction that the employer is allowed for these premiums.  The result is that the health insurance premiums paid for qualified employees will be 150% deductible for Alabama purposes.

Employers should begin acting soon to determine if they are a qualified employer, and which employees will meet the definition of qualified employee.  Please give us a call if you need help.