Many small businesses remain confused and concerned about the implications of the Affordable Care Act (Obamacare) on their employee health insurance plans. Actually, many small businesses and small tax-exempt organizations may be able to take advantage of a program called the Small Business Health Care Tax Credit (the “Credit”). Although the amount of this Credit differs for small businesses and for small tax-exempt organizations, the amount of the Credit increased in 2014 so employers who previously calculated only a relatively small benefit may wish to consider the Credit again.
To be eligible for the Credit, a small business or small tax-exempt organization generally must:
1. Have no more than 25 full-time equivalent (“FTE”) employees for the taxable year;
2. Pay average annual wages of no more than $50,000 (as adjusted for inflation; $50,800 for 2014); and
3. Provide health insurance coverage to its employees:
a. By making contributions toward a qualified health plan (“QHP”) employee health insurance premiums purchased through a Small Business Health Options Program (“SHOP Marketplace”), and
b. By making those contributions under a qualifying arrangement, which generally is one in which the employer pays an amount equal to at least 50% of the premium for each employee enrolled in coverage.
Amount of the Credit
For small businesses, up to 50 percent of the employer’s contribution toward QHP employee health insurance premiums is available as a Credit for periods after 2013. The full amount of the Credit is available to small business employers with 10 or fewer full-time equivalent (“FTE”) employees with employee average annual wages of not more than $25,000 (as adjusted for inflation; $25,400 for 2014).
The Credit is completely phased out for an employer with exactly 25 FTE employees or more, or with employee average annual wages of $50,800 or above (for 2014). The employer’s eligible premium contributions cannot exceed the average premium cost of health insurance for the small group market in the state or rating area. In addition, the employer must compare the actual premiums paid to the average premium table for the employer’s rating area and use the lesser of the two amounts in calculating its Credit. The average premium table is included in the instructions for the Form 8941 (Credit for Small Employer Health Insurance Premiums) used to claim the Credit and it is available on the IRS website.
For small tax-exempt organizations (described in Section 501(c) of the Internal Revenue Code of 1986, as amended) for periods after 2013, up to 35% of the tax-exempt employer’s contribution toward QHP employee health insurance premiums is available as a Credit. Although the Credit is refundable for tax-exempt employers, there are limits on the Credit, and sequestration will impact the refundable Credit.
Beginning with the first taxable year in or after 2014, an employer can only take the Credit for a maximum of two consecutive taxable years. Taking the Credit in a year before 2014 does not count toward the two-year limit.
Complex Calculations Might Be Worth It
There are many specific rules about the Credit, including which employees to count and how to make the computations to claim the credit. However, the Credit can be used to reduce a small employer’s actual tax liability or, subject to limitations, its alternative minimum tax liability. As a general business credit, the Credit can be carried back for one year and carried forward for 20 years. It is certainly worth taking the time to talk with your tax advisor to see if your small business can take advantage of the Small Business Health Care Tax Credit.