Credit for Small Employer Health Insurance Premiums
March 9, 2011
Payne, Nickles & Company
In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.
Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.
The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.
Eligible small businesses will first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on its income tax return.
Qualifying Arrangement (Per Form 8941 Instructions)
For a tax year beginning in 2010 only, a qualifying arrangement includes any arrangement that requires you to pay at least 50% of the premium cost for single (employee-only) coverage for each employee enrolled in any health insurance coverage you provide to employees, even if these contributions do not represent the same percentage of the premium for all of these employees. If an employee receives more expensive coverage (such as family coverage), it is still a qualifying arrangement if the employer pays at least 50% of the premium for single coverage even if that is less than 50% of the actual premium for the employee.
Individuals Considered Employees
In general, all employees who perform services for you during the tax year are taken into account in determining your FTEs, average annual wages, and premiums paid. Rules that apply to certain types of employees are discussed below.
Excluded employees. The following individuals are not considered employees when you figure this credit. Hours and wages of these employees and premiums paid for them are not counted when you figure your credit.
• The owner of a sole proprietorship.
• A partner in a partnership.
• A shareholder who owns (after applying the section 318 constructive ownership rules) more than 2% of an S corporation.
• A shareholder who owns (after applying the section 318 constructive ownership rules) more than 5% of the outstanding stock or stock possessing more than 5% of the total combined voting power of all stock of a corporation that is not an S corporation.
• A person who owns more than 5% of the capital or profits interest in any other business that is not a corporation.
• Family members or a member of the household who is not a family member but qualifies as a dependent on the individual income tax return of a person listed above. Family members include a child (or descendant of a child), a sibling or step sibling, a parent (or ancestor of a parent), a step-parent, a niece or nephew, an aunt or uncle, or a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. A spouse is also considered a family member for this purpose.
Tax Credit Calculator
For flow-through entities the credit offsets the owner’s tax on their individual returns.
For C Corporations the credit offsets ordinary income tax or alternate minimum tax. The credit is carryforwarded as a General Business Credit for 20 years, it is not refundable.
For tax exempt organizations the credit is refundable.
If you have any specific questions, please give us a call!
PAYNE, NICKLES & COMPANY
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing or recommending any transaction or matter addressed herein.