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Small Business Employee Benefits and HR Blog

FAQs - Small Employer Health Insurance Credits

In 2010, the Affordable Care Act created the small business health care tax credits, also known as the small employer health insurance credits. This article provides FAQs to help small businesses understand the health insurance credits in 2014 and beyond.

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What Are the Small Employer Health Insurance Credits?

The health insurance credits were created by the Affordable Care Act (ACA) to assist small employers in providing health insurance coverage to employees. As of 2014, the tax credit is worth up to 50 percent of a small employers’ contribution toward employees’ premium costs.

Which Small Employers Are Eligible for the Health Insurance Credits?

To be eligible for the credits, a small employer must meet the following criteria:

  • Have fewer than 25 full-time equivalent (FTE) employees

  • Pay an average annual wage of less than $50,000 per employee

  • Contribute at least half (50 percent) of their full-time employees’ insurance premiums; employers are not required to cover part-time employees or dependents

How Have the Small Employer Health Insurance Credits Changed in 2014?

For tax years beginning in 2014, there are several changes to the health insurance credits:

  • To be eligible for the credit small employers must pay premiums on behalf of employees enrolled in a qualified health plan offered through their state's Small Business Health Options Program (SHOP) Marketplace. One exception is if there are no SHOP Marketplace plans offered in their region.

  • The maximum credit increased from up to 35 percent to up to 50 percent of premiums paid. The maximum credit for tax-exempt employers increased from up to 25 percent to up to 35 percent of premiums paid.

  • The credit is available for eligible employers for no more than two consecutive taxable years.

Are the Credits Available for Small Employers Who Did Not Owe Tax During the Year?

According to the IRS, if a small employer did not owe tax during the year, the employer may apply the credit back or forward to other tax years. Additionally, since the amount of the health insurance premiums is in excess of the total credit, small employers who are eligible for the credit can still claim a business expense deduction for the premiums that are more than the credit.

Are Tax-Exempt Employers Eligible for Credits?

Yes. According to the IRS, a tax-exempt organization, described in Section 501(c), can be eligible for the credit as long as the organization meets the other eligibility criteria. The credit is refundable so long as it does not exceed the organization’s income tax withholding and Medicare tax liability.

How Does a Small Business Claim a Health Insurance Credit?

According to the IRS, an eligible small employer claims the credit on their annual income tax return by attaching Form 8941, showing their credit calculation. See the draft reporting forms here.

How Does a Tax-Exempt Employer Claim the Credit?

According to the IRS, a tax-exempt employer includes the amount of the credit on line 44f of Form 990-T, with the attached form 8941 showing their credit calculation.

Are There Any Other Options Outside of the SHOP Marketplace for Small Employers?

Yes. Since employers with under 50 FTE employees are not subject to the employer mandate, most small employers are seeing the advantages of individual health insurance and allowing employees to select their own health plan from the Individual Health Insurance Marketplace.

To continue offering a competitive health benefit, small employers are implementing a defined contribution health plan to reimburse employees for their individual health insurance premiums.

Read more about why so many small businesses are passing up the SHOP for individual exchanges and defined contribution.

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