The credit for small employer health insurance premiums was part of the Affordable Care Act (ACA) passed by Congress and signed into law by the president in March 2010. This credit was intended to provide relief for small employers because of the high costs of health insurance premiums.
- The employer's total contributions to a qualified health insurance arrangement for employees for the year OR
- The amount that would have been contributed during the year for health insurance coverage for its employees using the average premium for the small group market in the rating area in which the employee enrolled in coverage.
To qualify for the credit, small businesses need to be an eligible small business employer, which:
- Employs less than 25 full-time equivalent (FTE) employees during a tax year;
- Pays average annual wages of less than $50,800 per FTE employee beginning in 2014; and
- Has a qualified health insurance arrangement that requires the employer to make a non-elective contribution on behalf of each employee who enrolls in the employer's plan in an amount equal to a uniform percentage (of not less than 50 percent) of the plan's premium cost.
For example, if an eligible small business employer pays $17,000 in health insurance premiums for its employees during 2014, it could potentially receive a 50 percent tax credit or $8,500 ($17,000 x 50 percent). This credit would be calculated on IRS Form 8941 - Credit for Small Employer Health Insurance Premiums.
The credit was implemented in two phases. The first phase was for a four year period beginning in 2010 through 2013. During this time, the credit was 35 percent (not 50 percent) and the average annual salary increase per FTE employee was $50,000. Eligible employers could qualify if they could meet the criteria above.
The second phase of the credit covers a two year period beginning in 2014. The credit amount during this phase was increased to 50 percent, along with the average annual salary increase per FTE employee, which was increased to $50,800.
Additionally, there is one other change to the credit beginning in 2014: to be eligible for the credit, an eligible employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) on: www.healthcare.gov/marketplace. The SHOP Marketplace is part of the Affordable Care Act, and it is open to employers with 50 or fewer full-time equivalent employees. Employers can buy health insurance coverage for their employees in various ways; however, the only way to qualify for the Small Business Health Care Tax Credit is by using the SHOP marketplace to obtain coverage.
The ACA presents a substantial cost, along with the threat of penalties, for companies around the U.S. If you’re a small business, make sure you’re not leaving money on the table that could offset that cost.
Learn more about the Small Business Health Care Tax Credit by contacting Tommy Lee, partner at Habif, Arogeti & Wynne, LLP at firstname.lastname@example.org.