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. For tax years beginning after 2013, the credit is only available for a 2 consecutive tax year credit period. The maximum credit is generally a percentage of premiums the employer paid during the tax year for certain health insurance coverage the employer provided to certain employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace. But the credit may be reduced by limitations based on the employer's full-time equivalent employees, average annual wages, adjusted average premiums, and state premium subsidies and tax credits.

For tax-exempt eligible small employers, the maximum credit is 35% 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 eligible 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 eligible small employers, the maximum credit is 50% 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.

Partnerships, S corporations, cooperatives, estates, trusts, and tax-exempt eligible small employers must file this form to claim the credit. All other taxpayers must not complete or file this form if their only source for this credit is a partnership, S corporation, cooperative, estate, or trust. Instead, they must report this credit directly on line 4h in Part III of Form 3800, General Business Credit.

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, employee-only, dependent, 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 employee-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.

  
Although the term "eligible small employer" is defined in the Internal Revenue Code to include employers with "no more than" 25 FTEs, the phase out of the credit amount operates in such a way that an employer with exactly 25 FTEs is not in fact eligible for the credit.

3. You paid average annual wages for the tax year of less than $51,000 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 $51,000.

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.

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

  For details, see section 45R(e)(5)(A) and Regulations section 1.45R-2(b).

  
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.

Credit Period

For tax years beginning after 2013, the credit period during which the credit can be claimed is a 2 consecutive tax year period beginning with the first tax year in which:

  • An eligible small employer (or any predecessor) files an income tax return with an attached Form 8941, or

  • A tax-exempt eligible small employer (or any predecessor) files Form 990-T with an attached Form 8941.

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.

State premium subsidy or tax credit.   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.

Wellness programs.   A wellness program is generally an insurance program of health promotion or disease prevention. If you pay part or all of the cost of an employee's participation in a wellness program, use the amount you paid to figure your employer premiums paid.

Tobacco surcharges.   A tobacco surcharge is generally an additional amount charged for insurance for a tobacco user. If you pay part or all of an employee's tobacco surcharge, you cannot use the amount you paid to figure your employer premiums paid.

Dependent coverage.   Dependent coverage is generally coverage offered separately to an individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to a participant-employee, whether or not a dependent of the participant-employee. Dependent coverage does not include coverage, such as family coverage, which includes coverage of the participant-employee. If you pay part or all of the cost of an employee's dependent coverage, use the amount you paid to figure your employer premiums paid.

Portion of premiums paid.   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 employee-only coverage for each employee enrolled in any health insurance coverage you provide to employees. The total premium for each employee enrolled in 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 $13,000 per year or $250 ($13,000 ÷ 52) for each weekly payday.

Each payday you contribute $60 (60% of $100) toward the premium cost of each employee enrolled in 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 employee-only coverage) toward the premium cost of each employee enrolled in family coverage and withhold the remaining $190 from the employee's paycheck to obtain the $250 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 tax years beginning after 2013, health insurance coverage generally means coverage provided to employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace. For an exception that applies to certain employers in Washington and Wisconsin, see the Line A instructions, later. If this exception applies, health insurance coverage means coverage as defined under “Health Insurance Coverage” in the 2013 Instructions for Form 8941.

A stand-alone dental plan offered through a SHOP exchange will be considered a qualified health plan for purposes of the credit.

Exception for certain employers whose SHOP Exchange coverage did not begin on the first day of their tax year.   An eligible small employer will be treated as offering health insurance coverage through a SHOP Exchange for its entire 2014 tax year if it meets the following requirements.
  • As of August 26, 2013, the employer offered coverage in a plan year that did not begin on the first day of its tax year.

  • The coverage provided by this plan during the employer's 2014 tax year would have qualified for the credit under the pre-2014 credit rules.

  • The employer began offering coverage through a SHOP Exchange as of the first day of its plan year that began in 2014.

  Eligible small employers who meet these requirements can figure the credit at the 50% rate (35% rate for tax-exempt eligible small employers) for their entire 2014 tax year.

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

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, employee-only 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 information about the following exceptions, see Regulations section 1.45R-4.

State or local law.   You will be treated as satisfying the uniform percentage requirement if your failure to otherwise satisfy the requirement was solely attributable to additional contributions you made to certain employees to comply with state or local law.

Wellness program.   If a plan of an employer provides a wellness program, for purposes of meeting the uniform percentage requirement any additional amount of the employer contribution attributable to an employee's participation in the wellness program over the employer contribution with respect to an employee that does not participate in the wellness program is not taken into account in calculating the uniform percentage requirement, whether the difference is due to a discount for participation or a surcharge for nonparticipation. The employer contribution for employees who do not participate in the wellness program must be at least 50% of the premium (including any premium surcharge for nonparticipation). However, for purposes of figuring the credit, the employer contributions are taken into account, including those contributions attributable to an employee's participation in a wellness program.

Tobacco surcharge.   Any additional amount you or your employee pay to cover a tobacco surcharge is not taken into account in figuring the uniform percentage requirement. Amounts you or your employee pay to cover a tobacco surcharge are not considered premiums paid for health insurance coverage when figuring this credit.

Dependent coverage.   Premiums you pay for dependent coverage are not subject to the uniform percentage requirement. You are not required to pay a uniform percentage (not less than 50%) for dependent coverage.

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 employee-only coverage. It is a qualifying arrangement (assuming employee-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 employee-only coverage.

  • A uniform amount that is no less than the amount you would have paid toward employee-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 employee-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 employee-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 employee-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 employee-only coverage, or

  • A uniform percentage (not less than 50%) of your employer-computed composite rate (defined later) for your employee-only coverage for each employee enrolled in the employee-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 employee-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 employee-only coverage as discussed under Arrangements with list billing and only employee-only coverage above.

  • A uniform amount that is either equal to the amount you would have paid toward employee-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 employee-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 Regulations section 1.45R-4(c).

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.

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 Eligible Small Employers

The credit for tax-exempt eligible small employers cannot exceed the amount of certain payroll taxes. For tax years beginning in 2014, 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 2014.

  • Medicare taxes the tax-exempt employer was required to withhold from employees' wages in calendar year 2014.

  • Medicare taxes the tax-exempt employer was required to pay for calendar year 2014.

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.

  • Section 45R.

  • Regulations sections 1.45R-0 through 1.45R-5.

  • IRS.gov.


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