Small Employer Health Care Tax Credit

The Affordable Care Act (ACA) amended the Internal Revenue Code (Code) to create a tax credit for certain small employers that provide health care coverage to their employees. The ACA’s small employer health care tax credit, which is contained in Code Section 45R, became effective with the 2010 taxable year. It is designed to encourage small employers to offer health insurance coverage to their employees.

To be eligible for the tax credit, small employers must satisfy certain eligibility requirements, including requirements that they purchase health insurance coverage through a SHOP Exchange and pay at least half of the cost of single coverage for their employees. Also, starting in 2014, an employer may only claim the tax credit for two consecutive tax years.

Health Care Tax Credit

• An employer may only claim the credit for two consecutive tax years.
• The maximum credit is 50% of premiums paid (35% for tax-exempt small employers).
• Employers use IRS Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit.

Overview of the Health Care Tax Credit

In general, to be eligible for the ACA’s small employer health care tax credit, an employer must:

• Have fewer than 25 full-time equivalent employees (FTEs);
• Pay average annual wages of less than $50,000 (adjusted to $53,200 for 2018; $54,200 for 2019; $55,200 for 2020; $55,600 for 2021; $57,400 for 2022; $61,400 for 2023; $64,800 for 2024) per FTE;
• Purchase health insurance coverage for their employees through the Exchange’s Small Business Health Options Program (SHOP); and
• Pay at least 50% of the cost of employee-only (not family or dependent) health care coverage for each employee.

In addition, beginning in 2014, the credit is only available to an employer for two consecutive tax years.

Impact of the Credit on Small Employers

The small employer health care tax credit is intended to help small businesses and tax-exempt organizations that primarily employ low- and moderate-income workers provide health insurance coverage to their employees. The maximum credit is:

• 50% of premiums for small business employers; and
• 35% of premiums for small tax-exempt employers.

The maximum credit goes to smaller employers—those with 10 or fewer FTEs—that pay average annual wages of $25,000 or less (adjusted to $26,600 for 2018; $27,100 for 2019; $27,600 for 2020; $27,800 for 2021; $28,700 for 2022; $30,700 for 2023; $32,400 for 2024). Eligible small employers with more FTEs or higher average annual wages than these thresholds receive a reduced tax credit.

Small business employers that did not owe tax during the year can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit.

The credit is refundable for small tax-exempt employers. This means that, even if a tax-exempt employer does not have any taxable income, it may be eligible to receive the credit as a refund so long as it does not exceed the employer’s income tax withholding and Medicare tax liability.

Rules for Claiming the Credit

To be eligible for the health care tax credit, an employer must pay a uniform percentage (not less than 50%) of the self-only premium for each employee enrolled in a qualified health plan through a SHOP Exchange.

An employer must also have fewer than 25 FTEs and pay average wages of less than $50,000 per year (as adjusted annually).

• Under the rules for counting FTEs, two half-time workers count as one full-time employee. For example, 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10 not 20.
• Average annual wages are calculated by adding up the total wages paid by the employer during the tax year, and dividing that amount by the number of FTEs for the year. For example, if you are a small employer that has 10 FTEs and paid total annual wages of $200,000, the average annual wage would be $20,000 ($200,000 divided by 10).

Employers must use IRS Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. A small business should include the amount as part of the general business credit on its income tax return. A tax-exempt organization should include the amount on IRS Form 990-T, Exempt Organization Business Income Tax Return. An employer must file the Form 990-T in order to claim the credit, even if it does not ordinarily file this form.

Links and Resources

• IRS Q&As on the small employer health care tax credit are available on the IRS website
• Additional guidance is available on the IRS’s Small Business Health Care Tax Credit webpage
• On June 30, 2014, the IRS issued a final rule on the ACA’s small employer health care tax credit
• A Small Business Health Care Tax Credit Estimator and an FTE Calculator are available on HealthCare.gov.

_{Source: Internal Revenue Service}