From the Hotline: The Small Business Tax Credit

Question: Please describe how the Small Business Tax Credit under the Affordable Care Act works for small for-profit employers.

Answer: The tax credit program allows eligible small businesses that do offer employee health insurance some financial relief from the government.  For tax years 2010–2013, the maximum credit is 35% for small business employers and can rise to 50% in 2014.

In order to qualify:

  1. An employer must have fewer than 25 full-time equivalent employees (FTEs) for the taxable year;
  2. The average annual wages of its employees for the year must be less than $50,000; and
  3. The employer must pay at least 50% of the premium cost for single health care coverage for each employee.

For tax years 2010 through 2013, only premiums paid to a health insurance issuer, such as an insurance company, count for purposes of the credit. Premiums for insurance that covers a wide variety of conditions, such as a major medical plan, and premiums for coverage that is more limited in scope, such as dental or vision, also count.  Employer contributions to health reimbursement arrangements (HRAs), health flexible spending arrangements (FSAs) and health savings accounts (HSAs) are not taken into account for purposes of the credit.

The employer must pay at least 50% of coverage. However, if the employer provides more than one type of coverage or if the employer’s health provider does not charge the same premium for all enrolled employees, the employer may qualify even if he or she paid less than 50% of the premium cost for some employees.  If an employer pays only a portion of the premiums and employees pay the rest, the amount counted to calculate the credit is only the portion paid by the employer.  For example, if an employer pays 60% of the premiums and employees have the other 40% taken out of their pay, only the 60% paid by the employer counts.

The employer’s premium payment may not be more than the average premium for the small group market in the state where the employer offers coverage.

Beginning in 2014, the credit will be available only to small businesses that offer coverage to employees through a Small Business Health Options Program or SHOP.

How to Claim the Credit:  Small employers claim the credit on the annual income tax return, with an attached Form 8941 showing the calculation of the credit. Small business employers who did not owe tax during the year may be able to carry the credit back or forward to other tax years.

For more information about claiming the tax credit, visit:

http://www.irs.gov/pub/irs-utl/3_simple_steps.pdf

http://www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit:-Questions-and-Answers

The IRS Form 8941:  http://www.irs.gov/pub/irs-pdf/f8941.pdf

http://www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit-for-Small-Employers