General Instructions

Purpose of Form

Eligible small employers (defined below) use Form 8941 to figure the credit for small employer health insurance premiums for tax years beginning after 2009. The maximum credit is a percentage of premiums the employer paid during the tax year for certain health insurance coverage the employer provided to certain employees. But the credit may be reduced by limitations based on the employer's full-time equivalent employees, average annual wages, state average premiums, and state premium subsidies and tax credits.

For tax-exempt small employers, the credit is generally 25% of premiums paid, is also limited to the amount of certain payroll taxes paid, and is claimed as a refundable credit on Form 990-T, Exempt Organization Business Income Tax Return. A tax-exempt small employer is an eligible small employer described in section 501(c) that is exempt from taxation under section 501(a). A tax-exempt employer not described in section 501(c) is generally not eligible to claim this credit. However, a tax-exempt farmers' cooperative subject to tax under section 1381 may be able to claim the credit as a general business credit as discussed next.

For all other small employers, the credit is generally 35% of premiums paid, can be taken against both regular and alternative minimum tax, and is claimed as part of the general business credit on Form 3800.

Taxpayers other than partnerships, S corporations, cooperatives, estates, and trusts, whose only source of this credit is from those pass-through entities, are not required to complete or file this form. Instead, they can report this credit directly on Form 3800.

Eligible Small Employers

You are an eligible small employer for the tax year if you meet the following three requirements.

1. You paid premiums for employee health insurance coverage under a qualifying arrangement.   A qualifying arrangement is generally an arrangement that requires you to pay a uniform percentage (not less than 50%) of the premium cost for each enrolled employee's health insurance coverage (defined later). However, an arrangement that requires you to pay a uniform premium for each enrolled employee (composite billing) and offers different tiers of coverage (for example, self-only, self plus one, and family coverage) can be a qualifying arrangement even if it requires you to pay a uniform percentage that is less than 50% of the premium cost for employees not enrolled in self-only coverage.

  In addition, an arrangement that requires you to pay a separate premium for each employee based on age or other factors (list billing) can be a qualifying arrangement even if it requires you to pay a uniform percentage that is less than 50% of the premium cost for some employees.

  For details, see Employer Premiums Paid, Health Insurance Coverage, and Qualifying Arrangement, later.

2. You had fewer than 25 full-time equivalent employees (FTEs) for the tax year.   You may be able to meet this requirement even if you had 25 or more employees. For details, see Worksheets 1 and 2.

3. You paid average annual wages for the tax year of less than $50,000 per FTE.   For details, see Worksheets 1 and 3.

If you had more than 10 FTEs and average annual wages of more than $25,000, the FTE and average annual wage limitations (discussed later) will separately reduce your credit. This may reduce your credit to zero even if you had fewer than 25 FTEs and average annual wages of less than $50,000.

Employers treated as a single employer.   Treat the following employers as a single employer to figure the credit.
  • Employers who are corporations in a controlled group of corporations.

  • Employers who are members of an affiliated service group.

  • Employers who are partnerships, proprietorships, etc., under common control. See Regulations sections 1.414(c)-2, 1.414(c)-3, and 1.414(c)-4 for details.

  • Tax-exempt employers under common control. See Regulations section 1.414(c)-5.

  For details, see section 45R(e)(5)(A).

  
No more than one Form 8941 can be filed with a tax return, unless the exception described in Example 2 below applies.

  

Example 1.

You are a sole proprietor with two separate businesses and you file a separate Schedule C (Form 1040) for each business. You must treat both businesses as a single employer to figure the credit. You will file one Form 8941 for both businesses.

Example 2.

You and your spouse are both sole proprietors and file a separate Schedule C (Form 1040) for each of your separate businesses. Neither spouse was an employee of the other spouse or participated in the management of the other spouse's business at any time during the tax year. No more than 50% of the gross income of either business was derived from royalties, rents, dividends, interest, and annuities and you otherwise meet the requirements listed in Regulations section 1.414(c)-4(b)(5)(ii). Do not treat both businesses as a single employer to figure the credit. If you and your spouse are both eligible small employers, you can file two Forms 8941 with a jointly filed Form 1040.

Employer Premiums Paid

Only premiums you paid for health insurance coverage under a qualifying arrangement (discussed later) for individuals considered employees are counted when figuring your credit. For this purpose, if you are entitled to a state tax credit or a state premium subsidy paid directly to you for premiums you paid, do not reduce the amount you paid by the credit or subsidy amount. Also, if a state pays a premium subsidy directly to your insurance provider, treat the subsidy amount as an amount you paid for employee health insurance coverage.

If you pay only a portion of the premiums and your employees pay the rest, only the portion you pay is taken into account. For this purpose, any premium paid through a salary reduction arrangement under a section 125 cafeteria plan is not treated as an employer paid premium. For more information on cafeteria plans, see section 1 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.

Example 3.

You offer health insurance coverage to employees under a qualifying arrangement that requires you to pay 60% of the premium cost for single (employee-only) coverage for each employee enrolled in any health insurance coverage you provide to employees. The total premium for each employee enrolled in single (employee-only) coverage is $5,200 per year or $100 ($5,200 ÷ 52) for each weekly payday. The total premium for each employee enrolled in family coverage is $12,376 per year or $238 ($12,376 ÷ 52) for each weekly payday.

Each payday you contribute $60 (60% of $100) toward the premium cost of each employee enrolled in single (employee-only) coverage and withhold the remaining $40 from the employee's paycheck to obtain the $100 total weekly premium. Each payday you contribute $60 (the same amount you pay toward the premiums of employees enrolled in single coverage) toward the premium cost of each employee enrolled in family coverage and withhold the remaining $178 from the employee's paycheck to obtain the $238 total weekly premium.

To determine the premiums you paid during the tax year, multiply the number of pay periods during which the employee was enrolled in the health insurance coverage by $60. For example, you would have paid $3,120 ($60 × 52) for an employee who was enrolled for the entire tax year. You would have paid $600 ($60 × 10) for an employee who was only enrolled for 10 pay periods. You will need an additional set of calculations if the premium amounts changed during the tax year.

Health Insurance Coverage

For credit purposes, health insurance coverage means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance provider.

A health insurance provider is either an insurance company or another entity licensed under state law to provide health insurance coverage.

Health insurance coverage also includes coverage under the following plans.

  • Limited scope dental or vision plans.

  • Long-term care plans.

  • Nursing home care plans.

  • Home health care plans.

  • Community-based care plans.

  • Any combination of the above.

In addition, health insurance coverage includes the following.

  • Coverage only for a specified disease or illness.

  • Hospital indemnity or other fixed indemnity insurance.

  • Medicare supplemental health insurance.

  • Certain other supplemental coverage.

  • Similar supplemental coverage provided to coverage under a group health plan.

Employer premiums paid for health insurance coverage can be counted in figuring the credit only if the premiums are paid under a qualifying arrangement.

Health insurance coverage does not include the following benefits.

  • Coverage only for accident, or disability income insurance, or any combination thereof.

  • Coverage issued as a supplement to liability insurance.

  • Liability insurance, including general liability insurance and automobile liability insurance.

  • Workers' compensation or similar insurance.

  • Automobile medical payment insurance.

  • Credit-only insurance.

  • Coverage for on-site medical clinics.

  • Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.

Also, because the coverage must be offered by a health insurance provider as discussed above, health insurance coverage does not include benefits provided by the following.

  • Health reimbursement arrangements (HRAs).

  • Flexible spending arrangements (health FSAs).

  • Coverage under other self-insured plans.

  • Health savings accounts (HSAs).

However, health insurance coverage may include coverage under the following plans.

  • Church welfare benefit plans.

  • Multiemployer health and welfare plans that provide coverage through a health insurance provider.

For details, see Notice 2010-82 as discussed under More Information, later.

Qualifying Arrangement

A qualifying arrangement is generally an arrangement that requires you to pay a uniform percentage (not less than 50%) of the premium cost for each enrolled employee's health insurance coverage (defined earlier). An arrangement that offers different tiers of coverage (for example, self-only, self plus one, and family coverage) is generally a qualifying arrangement if it requires you to pay a uniform percentage (not less than 50%) separately for each tier of coverage you offer. However, an arrangement can be a qualifying arrangement even if it requires you to pay a uniform percentage that is less than 50% of the premium cost for some employees. For more details about the following exceptions, see Notice 2010-82 as discussed under More Information, later.

Arrangements with composite billing.    An arrangement that requires you to pay a uniform premium for each enrolled employee (composite billing) and offers different tiers of coverage can be a qualifying arrangement even if it requires you to pay a uniform percentage that is less than 50% of the premium cost for employees not enrolled in self-only coverage. It is a qualifying arrangement (assuming self-only coverage is the least expensive tier of coverage) if it requires you to pay the following amounts.
  • A uniform percentage (not less than 50%) of the premium cost for each employee (if any) enrolled in self-only coverage.

  • A uniform amount that is no less than the amount you would have paid toward self-only coverage for each employee (if any) enrolled in self plus one coverage.

  • A uniform amount that is no less than the amount you would have paid toward self-only coverage for each employee (if any) enrolled in family coverage.

  • A uniform amount that is no less than the amount you would have paid toward self-only coverage for each employee (if any) enrolled in any other tier of coverage (figured separately for each tier).

Arrangements with list billing and only self-only coverage.   An arrangement that requires you to pay a separate premium for each employee based on age or other factors (list billing) that only provides self-only coverage can be a qualifying arrangement even if it requires you to pay a uniform percentage that is less than 50% of the premium cost for some employees. It is a qualifying arrangement if it requires you to pay either of the following amounts.
  • A uniform percentage (not less than 50%) of the premium charged for each employee enrolled in the self-only coverage, or

  • A uniform percentage (not less than 50%) of your employer-computed composite rate (defined later) for your self-only coverage for each employee enrolled in the self-only coverage.

Arrangements with list billing and other tiers of coverage.   An arrangement that requires you to pay a separate premium for each employee based on age or other factors (list billing) that provides other tiers of coverage can be a qualifying arrangement even if it requires you to pay a uniform percentage that is less than 50% of the premium cost for some employees. It is a qualifying arrangement (assuming self-only coverage is the least expensive tier of coverage) if it requires you to pay the following amounts.
  • A uniform percentage (not less than 50%) for each employee enrolled in self-only coverage as discussed under Arrangements with list billing and only self-only coverage above.

  • A uniform amount that is either equal to the amount you would have paid toward self-only coverage (as discussed above), a uniform percentage (not less than 50%) of the premium charged, or a uniform percentage (not less than 50%) of your employer-computed composite rate (defined below) for your self plus one coverage, for each employee (if any) enrolled in self plus one coverage.

  • A uniform amount that is either equal to the amount you would have paid toward self-only coverage (as discussed above), a uniform percentage (not less than 50%) of the premium charged, or a uniform percentage (not less than 50%) of your employer-computed composite rate (defined below) for your family coverage, for each employee (if any) enrolled in family coverage.

  • A uniform amount that is either equal to the amount you would have paid toward self-only coverage (as discussed above), a uniform percentage (not less than 50%) of the premium charged, or a uniform percentage (not less than 50%) of your employer-computed composite rate (defined below) for any other tier of coverage, for each employee (if any) enrolled in any other tier of coverage (figured separately for each tier).

Employer-computed composite rate.   The employer-computed composite rate for a tier of coverage is the average rate determined by adding the premiums for that tier of coverage for all employees eligible to participate in the health insurance plan (whether or not they actually receive coverage under the plan or under that tier of coverage) and dividing by the total number of such eligible employees.

More than one plan.   Different types of health insurance plans are generally not aggregated for purposes of meeting the qualifying arrangement requirement. For example, if you offer a major medical insurance plan and a stand-alone vision plan, you generally must separately satisfy the requirements for a qualifying arrangement with respect to each type of coverage. For exceptions, see Notice 2010-82 as discussed under More Information, later.

State subsidies and credits.   For this purpose, if you are entitled to a state tax credit or a state premium subsidy paid directly to you for premiums you paid, do not reduce the amount you paid by the credit or subsidy amount. Also, if a state pays a premium subsidy directly to your insurance provider, treat the subsidy amount as an amount you paid for employee health insurance coverage.

Multiemployer health and welfare plans.   For a special rule that applies to multiemployer health and welfare plans, see Notice 2010-82 as discussed under More Information, later.

State Premium Subsidy and Tax Credit Limitation

Your credit may be reduced if you are entitled to a state tax credit or a state premium subsidy for the cost of health insurance coverage you provide under a qualifying arrangement to individuals considered employees. The state tax credit may be refundable or nonrefundable and the state premium subsidy may be paid to you or directly to your insurance provider.

Although a state tax credit or premium subsidy paid directly to you does not reduce the amount of your employer premiums paid, and although a state premium subsidy paid directly to an insurance provider is treated as an employer premium you paid, the amount of your credit cannot be more than your net premium payments.

Net premium payments are employer premiums paid (discussed earlier) minus the amount of any state tax credits you received or will receive and any state premium subsidies paid either to you or directly to your insurance provider for premiums for health insurance coverage you provide under a qualifying arrangement to individuals considered employees.

Payroll Tax Limitation for Tax-Exempt Small Employers

The credit for tax-exempt small employers cannot exceed the amount of certain payroll taxes. For tax years beginning in 2013, payroll taxes, for this purpose, mean only the following taxes.

  • Federal income taxes the tax-exempt employer was required to withhold from employees' wages in calendar year 2013.

  • Medicare taxes the tax-exempt employer was required to withhold from employees' wages in calendar year 2013.

  • Medicare taxes the tax-exempt employer was required to pay for calendar year 2013.

Premium Deduction Reduced

You must reduce your deduction for the cost of providing health insurance coverage to your employees by the amount of any credit for small employer health insurance premiums allowed with respect to the coverage.

More Information

For more information about this credit, see the following.


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