Changes coming for small business health care tax credit

TAX ALERT  | 

For tax years 2010 through 2013, eligible small employers are entitled to a 35 percent tax credit for health insurance premiums they pay for employees. Tax-exempt entities are eligible for a 25 percent credit.

To qualify for the credit, an employer must:

  • Have fewer than 25 full-time equivalent (FTE) employees for the tax year
  •  Pay average annual wages of less than $50,000 per FTE
  • Pay not less than 50 percent of the premium for qualifying employee health insurance

Employers with less than 10 FTEs and average annual wages of $25,000 or less are eligible for the full credit. There is a phase-out of the credit for employers that have between 10 and 25 FTEs or average annual wages between $25,000 and $50,000.

All employers calculate the credit using IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Taxable employers claim the credit on their federal tax return and can apply the credit to both regular and alternative minimum tax. Tax-exempt employers claim the credit by filing Form 990-T, Exempt Organization Business Income Tax Return, and can receive a refundable credit up to the amount of the employer’s payroll taxes.

Changes in 2014 

In 2014, the credit will continue to be available, but with significant modifications. Employers will only be eligible for the credit if they purchase health insurance through the new Small Business Health Options Program (SHOP). The SHOP is one component of the internet-based health insurance marketplace, also known as an exchange, which launches on Oct. 1, 2013.

Other upcoming changes include:

  • The maximum credit increases to 50 percent (35 percent for tax-exempt organizations)
  • The $50,000 and $25,000 average annual dollar amounts will be indexed for inflation
  • The credit is based on the lesser of the employer’s actual premium payments or the average premiums in the small group market in its employees’ rating area
  • The credit is only available for two consecutive tax years after 2013, but it can be carried back or carried forward

Jill Harris, Director, Washington National Tax

Bill O'Malley, Director, Washington National Tax

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