Overview of the Small Business Health Care Tax Credit
As part of the Patient Protection and Affordable Care Act, eligible small businesses and small tax-exempt organizations will be able to receive a credit for a portion of the health care premiums they pay for their employees. In order to be eligible to claim a credit, the employer must pay premiums for the cost of coverage for some of its employees in an amount equal to a uniform percentage, not less than 50%, of the premium cost of coverage. In addition, an employer must employ less than the equivalent of 25 full-time employees (e.g., less than 50 half-time employees) and pay average annual wages of less than $50,000.
For the years 2010 to 2013, the maximum credit is 35% of health care premiums paid by small business employers and 25% of premiums paid by eligible employers that are tax-exempt organizations. In 2014 this percentage will increase to 50% (35% for tax-exempt employers). The credit is gradually phased out for employers paying average annual wages between $25,000 and $50,000 and for employers having between 10 and 25 full-time equivalent employees.
Claiming the Tax Credit
Eligible small businesses will use Form 8941 to calculate the amount of the credit and will include the amount of the credit as part of the general business tax credit on their income tax returns. Eligible small tax-exempt organizations will use Form 8941 to calculate their refundable credit, and then claim the credit on Line 44f of revised Form 990-T. Form 990-T will be revised for the 2011 tax filing season to enable eligible tax-exempt organizations to claim the small business health care tax credit even if they owe no tax on unrelated business income. For additional information on how to calculate the credit, see the Instructions for Form 8941.
Additional Guidance on the Tax Credit
On December 2, 2010, the Internal Revenue Service issued final guidance on the small business health care tax credit for the 2010 tax year, in the form of Notice 2010-82. Some of the issues clarified by Notice 2010-82 include the following:
- To be eligible for the tax credit, there is no requirement that the employer be performing services in a trade or business.
- Sole proprietors, partners in a partnership, shareholders owning more than two percent of the stock in an S corporation, and any owners of more than five percent of other businesses are not taken into account as employees, nor are family members of these employees.
- Leased employees are counted in computing an employer’s annual wages and the number of the employer’s full-time equivalent employees.
- Wages are defined as FICA wages without regard to the wage base limitation.
- In calculating an employee’s hours of service for purposes of determining the number of the employer’s full-time equivalent employees, an employer may (1) count actual hours, (2) use a days-worked equivalency, or (3) use a weeks-worked equivalency.
- Contributions by an employer to a multiple employer health and welfare plan providing health insurance coverage are treated as the payment of health insurance premiums by the employer.
- Self-insured plans, including Health Reimbursement Arrangements (HRAs) and health Flexible Spending Arrangements (health FSAs), are not health insurance coverage for purposes of the credit, but church welfare benefit plans will be treated as providing health insurance coverage.
For more information on the small business health care tax credit, contact your SGR Executive Compensation and Employee Benefits counsel.