Understanding the small employer health care tax credit
Posted On: 2-18-2015 | Posted By: Debbie Mathes, CPA
The small employer health insurance tax credit was created by the Patient Protection and Affordable Care Act to help small businesses and small tax-exempt organizations afford the cost of providing health insurance coverage for their employees. However, many potentially eligible employers have gone through the relatively complex credit calculation and have been disappointed to find they were eligible only for a small credit or none at all. We’re here to help you understand eligibility and claim requirements.
For tax years 2010 through 2013, the maximum credit was 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers. Because the maximum potential credit increased for 2014, employers that previously qualified for the credit may be anticipating a larger credit for 2014, but most will find that is not the case.
For tax years beginning in 2014 or later, small employers will find the following changes to the credit.
- The maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
- To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
- The credit is available to eligible employers for two consecutive taxable years.
Additionally, for the first time in 2014, employers had to purchase the insurance through the SHOP Marketplace (or qualify for an exception to this requirement) to be eligible for the credit for tax years 2014 and beyond. However, the launch of the online SHOP portal was delayed while fixes were made to the marketplace last year and was not available until October 2014 to enroll for coverage beginning January 1, 2015. To work around the delay in the online SHOP Marketplace going “live,” small employers were able to enroll in a SHOP plan through a broker or via a paper application.
For 2014 only, the broker or paper enrollment process will count as SHOP Marketplace participation and allow those employers to be eligible for the credit. For the 2015 coverage year, employers are required to participate in the online SHOP exchange to be eligible for the credit in 2015.
Which employers qualify?
As was required before the 2014 changes, the employer must still pay premiums for employee health insurance under a qualifying arrangement; have fewer than 25 full-time-equivalent employees (FTEs) for the tax year; and pay average annual wages of less than $50,800 (inflation-adjusted for tax years beginning in 2014).
A qualifying arrangement generally is one in which the employer pays at least 50% of the premium cost for single (employee-only) coverage.
The credit phases out for 2014 as average annual wages increase and/or average full-time-equivalent employees increase.
Claiming the credit
The credit is claimed using Form 8941. It is part of the general business credit, meaning unused portions can be carried back one year and forward 20 years. The credit applies to both regular income taxes and alternative minimum tax.
For tax-exempt small employers, the credit is also calculated on Form 8941 and is attached to Form 990-T, Exempt Organization Business Income Tax Return. The credit is refundable and limited to the payroll taxes (federal income taxes withheld, Medicare taxes withheld, and employer Medicare taxes paid) for the tax year.
Clearly, claiming the small employer health care tax credit is not easy. For assistance with the calculations or understanding the rules, contact your WK advisor at (573) 442-6171 or (573) 635-6196.