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Tax Credit for Small Businesses Providing Health Insurance

The Affordable Care Act created a tax credit for small businesses that offer health insurance to their employees. The credit can be claimed for premiums paid for health insurance and certain other types of coverage, including stand-alone dental and vision plans.

Who can claim the credit?

The credit is available to eligible smaller-size businesses that employ low to moderate income workers. Both for-profit and nonprofit businesses that have fewer than 25 full-time equivalent workers, average annual wages of less than $50,000, and pay for at least half the cost of employees’ health insurance premiums may qualify for a credit.

What is the maximum amount of the credit?

In general, for the years 2010-2013, for-profit businesses can claim up to 35% and nonprofits can claim up to 25% of the employer’s contribution towards workers’ premiums. The amount of the employer contribution that can be claimed is calculated using the actual premiums charged the group or the average premium in the state, whichever is lower.

Starting in 2014, the credit increases up to 50% for for-profit businesses and 35% for nonprofits for coverage purchased through an Exchange. The increased credit will be available for 2 years.

Use this estimator by H&R Block to see what your potential tax credit might look like.

How is the credit claimed?

Small businesses and tax-exempt organizations will use a Form 8941 “Credit for Small Employer Health Insurance Premiums” to calculate the amount of the credit. Small businesses will then include the amount of the credit as part of the general business credit on their income tax returns.

Tax-exempt organizations will claim the credit on a revised Form 990-T, even if they do not owe taxes on unrelated business income. Information on these Forms can be found here: http://www.irs.gov/newsroom/article/0,,id=231928,00.html

Quick facts

Who? Small businesses that employ fewer than 25 full-time equivalent (FTE) workers, pay annual average wages of less than $50,000, and contribute an amount equal to at least 50% of the cost of employee-only coverage may be eligible for the tax credit. A few things to note:

  • “FTE workers” means businesses that have more than 25 employees may qualify for the credit if some of the employees work part-time.

    • Not everyone at a small business is counted as an employee. In general, partners in a business and certain owners (e.g., sole proprietors, partners in a partnership, etc.) as well as family members of these individuals – even if they work in the small business – are not counted when calculating FTEs, average annual wages or the premiums paid by the employer.

    • All employees eligible to be counted must be included, even if the employee does not receive health insurance from the employer. For example, former employees during the year and employees covered under a collective bargaining agreement must be counted when calculating the number of FTE workers.

    • The IRS provides employers with three methods for calculating the total number of hours worked by employees - see IRS Notices 2010-44 and 2010-82 for more information

    • In Notice 2010-82, the IRS provides more details on specific employer situations, including how employers with leased employees, employers participating in multiemployer plan, and church plans are treated.

  • To help employers meet the law’s contribution requirement, the IRS is providing “transition relief.” Under this relief, employers that pay an amount equal to at least 50% of the employee-only premium for each employee can qualify for the credit, even if the percent of the premium contributed varies across employees. For more information on this transition relief, see IRS Notice 2010-44 and Notice 2010-82.

    • In determining the employer contribution, premiums paid by employees through a Section 125 Cafeteria Plan do not count as employer contributions.

    • Employer contributions to self-insured plans are not eligible for this credit, including contributions to Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs) and Flexible Spending Arrangements (FSAs).

    • Although the tax credit can be claimed for health insurance and certain other plans, such as dental or vision-only plans, the plans cannot be aggregated to meet the eligibility criteria. The employer has to meet the requirements of the credit for each plan separately.

What? A tax credit up to 35% of the amount an employer pays for employees’ health insurance premiums may be claimed by businesses with 10 or fewer FTE workers, average annual wages of less than $25,000, and whose premium costs are not more than the average premium for small group coverage in the State. For nonprofit organizations, the credit is limited to 25% of their premium costs. The credit reduces as the size of the business increases, and businesses with 25 or more FTE workers or annual average wages of $50,000 or more are not eligible for the credit.

  • If the actual premiums paid by a business are higher than the average premium for small group coverage in the State, then the credit is calculated using the lower average premium amount.

    • Although eligibility for the credit is determined separately for each type of plan (e.g., health insurance, a dental-only plan), the premiums paid by the employer for all eligible plans are considered together and capped at the average premium for the small group market.

When? For the next four years (2010-2013), up to 35% of the amount a for-profit business pays and up to 25% of the amount a nonprofit pays towards employees’ premiums may be claimed as a credit. Credits will be increased and available for two years for coverage purchased through an Exchange starting in 2014.

How? IRS has released Form 8941 “Credit for Small Employer Health Insurance Premiums” for eligible small businesses and tax-exempt organizations to use in calculating the health care tax credit. The form can be found here: http://www.irs.gov/pub/irs-pdf/f8941.pdf and instructions for this form can be found here: http://www.irs.gov/pub/irs-pdf/i8941.pdf

  • Eligible for-profit small businesses will include the amount of the credit on their annual income tax return. The amount claimed as a credit cannot also be deducted as a business expense. Businesses with tax liability less than the amount of the credit will not receive a refund but may be able to carry the credit forward for use in future years.

Eligible tax-exempt organizations will claim the credit on a revised Form 990-T, which will enable eligible organizations to claim the small business health care tax credit even if they do not owe taxes on unrelated business income. Although the credit is refundable for these organizations, the amount of the credit cannot exceed income tax withholding and Medicare tax liability. A draft copy of the Form 990-T can be found here: http://www.irs.gov/pub/irs-dft/f990t--dft.pdf

Want to know more?

Sources: Patient Protection and Affordable Care Act, and IRS website http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6 and linked web pages (last accessed on December 14, 2010), IRS Notice 2010-44 and IRS Notice 2010-82

Page last updated: February 1, 2013


  

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