Small Business Health Care Tax Credit Questions and Answers: Who Gets the Tax Credit
Q1. Who is eligible?
A1. A small employer is eligible for the credit if (a) it has fewer than 25 full-time equivalent employees, (b) the average annual wages of its employees are less than $50,000 (adjusted for inflation beginning in 2014), and (c) it pays a uniform percentage for all employees that is equal to at least 50% of the premium cost of employee-only insurance coverage. Each part-time employee counts as a fraction of a full-time equivalent employee (for example, two half-time employees equal one full-time equivalent employee for purposes of the credit). For tax years beginning in 2014 or later, the employer generally must contribute toward premiums on behalf of each employee enrolled in a qualified health plan (QHP) offered by the eligible small employer through a Small Business Health Options Program (SHOP Marketplace) established as part of the Affordable Care Act to qualify for the credit.
Q2. Can a tax-exempt organization be eligible?
A2. Yes. A tax-exempt organization described in section 501(c) of the Internal Revenue Code (Code) and exempt from tax under section 501(a) of the Code that otherwise meets the definition of an eligible small employer may qualify for the credit. The credit is refundable for tax-exempt employers but is limited to the amount of the tax-exempt employer’s payroll taxes withheld during the calendar year in which the taxable year begins. See the “What is the maximum credit for a tax-exempt qualified employer?” question on the Calculating the Credit page.
Q3. How does the credit change in 2014?
A3. There are a few statutory changes to the credit for tax years beginning in 2014 and forward.
- Employers generally must enroll in a QHP through their designated SHOP Marketplace (or through a direct enrollment process if available).
- The maximum credit amount increases from 35% to 50% of premiums paid for eligible small employers and from 25% to 35% of employer premiums paid for tax-exempt eligible small employers.
- An employer must contribute a uniform percentage of premiums (at least 50%) on behalf of each employee enrolled in a QHP offered by the small employer through a SHOP Marketplace.
- An employer may claim the credit for no more than two-consecutive taxable years, beginning with the first taxable year in or after 2014 in which the eligible small employer attaches a Form 8941, Credit for Small Employer Health Insurance Premiums, to its income tax return, or in the case of a tax-exempt eligible small employer, attaches a Form 8941 to the Form 990-T, Exempt Organization Business Income Tax Return.
- Cost-of-living adjustments are made to the average annual wage phaseout amounts. (The credit is phased out gradually when average annual wages exceed certain amounts.)
Q4. Are there exceptions to the requirement to offer health coverage through the SHOP Marketplace to be eligible to claim the credit?
A4. Yes, in some circumstances, an employer whose plan year and tax year do not match may still claim the 2014 credit, as may eligible small employers located in specific counties where QHPs are not available through a SHOP Marketplace in 2014. See questions 5, 6A and 6B below.
Q5. What if an eligible small employer’s health plan year is not the same as its 2014 taxable year and the employer does not switch to SHOP coverage until the beginning of its 2014 plan year? Can the employer still claim the credit for the entire 2014 taxable year?
A5. Yes. For the 2014 taxable year, an eligible small employer does not need to switch plans mid-year to comply with the requirement that an employer offer coverage to its employees through a SHOP Marketplace. If, as of August 26, 2013, the employer has a plan year that begins after the start of its taxable year, the employer may claim the credit for premiums paid for the entire 2014 taxable year at up to the maximum 50% rate (up to 35% for tax-exempt employers) if (1) the employer begins offering coverage through a SHOP Marketplace on the first day of the plan year; (2) the employer offers coverage during the period before the first day of the plan year that would have qualified the employer for the credit under the rules applicable to years prior to 2014, and (3) the employer begins offering coverage through a SHOP Exchange as of the first day of its plan year that begins in 2014.
Example: The employer is an eligible small employer and a calendar year taxpayer. As of Aug. 26, 2014, the employer’s health plan year runs from July 1 through June 30. The employer offers a QHP to its employees through the SHOP Marketplace on July 1, 2014. If, from Jan. 1, 2014, through June 30, 2014, the employer has been offering coverage to its employees under the rules applicable to years before 2014, then the employer may claim the credit for premiums paid on behalf of each employee enrolled in coverage for the entire 2014 taxable year at up to the 50% rate (up to 35% for tax-exempt employers), even though the employer did not offer coverage through a SHOP Marketplace for the first six months of 2014.
For a detailed description of transition rule applicable to the SHOP Marketplace, see §1.45R-3(i) of the final regulations.
Q6A. If my principal place of business is in Washington or Wisconsin and QHPs are not available through a SHOP Marketplace in 2014 in the county where my business is located, can I still qualify for the credit?
A6A. A small employer with a principal business address in one of the counties listed below, where QHPs are not available through the SHOP Marketplace in 2014, may claim the credit under the pre-tax year 2014 rules. The credit will be calculated at the maximum 50% rate (35% rate for tax-exempt eligible small employers) for the entire 2014 taxable year, and the 2014 taxable year will be the first year of the two consecutive taxable year credit period. For a detailed description of this transition relief, see Notice 2014-6.
Adams, Asotin, Benton, Chelan, Clallam, Columbia, Douglas, Ferry, Franklin, Garfield, Grant, Grays Harbor, Island, Jefferson, King, Kitsap, Kittitas, Klickitat, Lewis, Lincoln, Mason, Okanogan, Pacific, Pend Oreille, Pierce, San Juan, Skagit, Skamania, Snohomish, Spokane, Stevens, Thurston, Wahkiakum, Walla Walla, Whatcom, Whitman, and Yakima counties.
Green Lake, Lafayette, Marquette, Florence, and Menominee counties.
Q6B. If my principal place of business is in Iowa and QHPs are not available through a SHOP Marketplace for all or part of 2015 in the county where my business is located, can I still qualify for the credit?
A6B. A small employer with a principal business address in one of the counties listed below, where QHPs are not available through the SHOP Marketplace for all or part of 2015, may claim the credit under the pre-tax year 2014 rules. The credit will be calculated at the maximum 50% rate (35% rate for tax-exempt eligible small employers) for the entire 2015 taxable year. If the eligible small employer does not claim the credit for the 2014 taxable year, but claims the credit for the 2015 taxable year, then the 2015 taxable year will be the first year of the two consecutive taxable year credit period. If the eligible small employer first claims the section 45R credit for the 2014 taxable year, then the 2015 taxable year is the second year of the two-consecutive taxable year credit period, regardless of whether the eligible small employer takes advantage of the relief described in this paragraph. For a detailed description of this relief, see Notice 2015-08.
Adair, Adams, Appanoose, Audubon, Benton, Black Hawk, Boone, Bremer, Buchanan, Buena Vista, Butler, Calhoun, Carroll, Cass, Cedar, Cerro Gordo, Cherokee, Chickasaw, Clarke, Clinton, Crawford, Dallas, Davis, Decatur, Delaware, Des Moines, Dubuque, Floyd, Franklin, Fremont, Greene, Grundy, Guthrie, Hamilton, Hancock, Hardin, Harrison, Henry, Humboldt, Iowa, Jackson, Jasper, Jefferson, Johnson, Jones, Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska, Marion, Marshall, Mills, Mitchell, Monona, Monroe, Montgomery, Muscatine, Page, Palo Alto, Pocahontas, Polk, Pottawattamie, Poweshiek, Ringgold, Sac, Scott, Shelby, Story, Tama, Taylor, Union, Van Buren, Wapello, Warren, Washington, Wayne, Webster, Winnebago, Worth, and Wright counties.
Q7. What if an employer already claimed the credit for prior years? Can the employer still take advantage of the credit in 2014?
A7. Yes, if an eligible small employer takes the credit for tax years beginning in 2010 through 2013, those years do not count toward the two-consecutive taxable year period. Starting in 2014, an employer may claim the credit for two-consecutive taxable years, beginning with the first taxable year in or after 2014 in which the eligible small employer attaches a Form 8941 to its income tax return, or in the case of a tax-exempt eligible small employer, attaches a Form 8941 to the Form 990-T.
Q8. Is a household employer eligible for the credit, even if he or she has employees who are not performing services in a trade or business?
A8. Yes, a household employer may be eligible for the credit.
Q9. Is an employer outside the U.S. eligible for the credit?
A9. An employer located outside the United States (including a U.S. territory) may be an eligible small employer if the employer has income effectively connected with the conduct of a trade or business in the United States, and otherwise meets the requirements for claiming the credit.
Q10. How are employer contributions to a multiemployer plan treated for purposes of the credit?
A10. For taxable years 2010 through 2013, contributions by an employer to a multiemployer plan (but not self-insured health coverage offered through a multi-employer plan) are treated as premiums paid by the employer for purposes of the credit. However, 100 percent of the cost of coverage must be paid from employer contributions, not by employee contributions to satisfy the uniform percentage requirement for premiums paid on behalf of each employee covered by the multiemployer plan. See Notice 2010-82 for more guidance. For tax years 2014 and forward, eligibility for the credit depends on employers contributing on behalf of employees enrolled in a QHP offered to employees by the employer through a SHOP Marketplace.
Q11. Can a section 521 farmers cooperative be eligible?
A11. Yes. A section 521 farmers cooperative subject to tax under section 1381 may be eligible for the credit if it otherwise meets the definition of an eligible small employer. See the “Who is eligible?” question on this page.