The ACA provides for a small employer tax credit for small businesses and tax-exempt organizations that provide health coverage to their employees. The credit is only available to the employer who purchases group coverage through the SHOP (exchange marketplace) and is only available when applied for in two consecutive years.
The small business tax credit is available to employers that:
- Have fewer than 25 full-time equivalent (FTE) employees
- Pay an average annual wage of less than $50,000 per employee ($53,000 in 2018 and $52,400 in 2017)
- Contribute a uniform percentage of at least 50% of the premium cost of single coverage for each enrolled employee (35% for tax exempt organizations)
Eligible “Plans” include limited scope dental, vision, long-term care (LTC) and Medicare supplement. See IRS Bulletin 2010-44. The tax credit only applies to the portion paid for by the employer. For purposes of the credit, a premium paid by a salary reduction arrangement under a cafeteria plan is not treated as paid by the employer.
The maximum credit is available only for employers with 10 or fewer full-time employees (FTEs) with an average annual wage of $27,100 (in 2019) or less.
The tax credit then phases out for employers with between 10 and 25 FTEs and those with annual average wages between $27,100 and $53,200.
Credit is claimed on the employer’s annual income tax return.
In general, all employees of the eligible small employer are considered when determining FTEs and average annual wages, including employees who terminated employment during the tax year, employees covered under a collective bargaining agreement, and employees who are not enrolled in health care coverage.
The following individuals are not considered employees for purposes of the credit:
- Owners of the small business, such as sole proprietors, partners, shareholders owning greater than 2% of an S corporation or more than 5% of a C corporation
- Spouses of owners
- Family members of owners, which includes a child, grandchild, sibling or step-sibling, parent or ancestor of a parent, a step-parent, niece or nephew, aunt or uncle, son-in-law or daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
- A spouse of any of the above family members should also not be counted as an employee.
If an employer takes the tax credit, it will affect the employer’s deduction for health insurance premiums. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.
Visit the following for more information on determining eligibility:
- IRS – Steps to Determine if you Qualify for the Small Business Health Care Tax Credit
- IRS – Small Business Health Care Tax Credit Scenarios
In order to apply for the credit, a small employer must complete the SHOP employer application and mail it to the address listed on the application. This determines the group’s eligibility for SHOP. This is not a commitment on the group’s behalf to enroll in SHOP. It will determine if the group is eligible.
The tax credit is between the employer and the IRS and is handled at tax time. The carrier will bill the group the full premium and expect the group to pay what is billed. The group can determine if they will receive a tax credit. The criteria are listed in the below information from healthcare.gov and irs.gov:
Example: For 2019, an employer with 9 FTEs with an average wage of $23,000 per FTE. The employer pays $72,000 in health care premium. The credit equates to $25,200 (35% x $72,000).
The maximum credit for a tax-exempt employer is 25% of the premium expenses.
Religious institutions, household employers and U.S. employers who are out of U.S. territory but who offer health coverage from an insurer in the U.S. qualify.
The guidance under IRS 2010-117 makes it clear that religious institutions that obtain coverage through a denominational organization that self-insures the coverage can qualify for the credit even though the coverage is not fully-insured. This rule applies solely for purposes of eligibility for the small business tax credit.
Commonly owned businesses may not separate to become eligible for the tax credit.
The tax credit is claimed as a general business credit on Form 3800 or 990-T for tax-exempt small employers. Please use Form 8941 and instructions.
The amount of the credit is calculated by taking a percentage of the lesser of:
- The non-elective contributions paid by an eligible employer on behalf of employees during the tax year; or
- The non-elective contributions the employer would have made if employees were enrolled in a plan with premiums equal to the average premium for the small group market in the state where the employer is offering coverage. For this purpose, IRS Revenue Ruling 2010-13 establishes the premiums for the 2010 tax year.
For assistance with calculating FTEs or the Tax Credit, visit HealthCare.gov’s SHOP Tools and Calculators.