Small Business Health Care Tax Credit Questions and Answers: Who Gets the Tax Credit
Q. Who is eligible?
A. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time or a combination of full-time and part-time (for example, two half-time employees equal one employee for purposes of the credit), the average annual wages of employees must be less than $50,000 (adjusted for inflation beginning in 2014), and the employer must pay a uniform percentage for all employees that is equal to at least 50% of the premium cost of the insurance coverage. For tax years beginning in 2014 or later, the employer 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.
Q. Can a tax-exempt organization be eligible?
A. 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.
Q. How does the credit change in 2014?
A. There are a few important changes to the credit for tax years beginning in 2014 and forward.
- Employers must enroll in a QHP through their designated SHOP Marketplace (or through a direct enrollment process if available).
- The credit amount increases to 50% of premiums paid for eligible small employers and 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 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.)
Q: What if an eligible small employer’s 2014 health plan year is not the same as its 2014 taxable year? Can the employer still claim the credit for the entire 2014 taxable year?
A. 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. An employer that has a plan year that begins after the start of its taxable year may count premiums paid for the entire 2014 taxable year if (1) the employer begins offering coverage through a SHOP Marketplace on the first day of the 2014 health plan year; and (2) the employer offers coverage during the period before the first day of the 2014 health plan year that would have qualified the employer for the credit under the rules applicable to years before 2014.
Example: The employer is an eligible small employer and a calendar year taxpayer. The employer’s health plan year runs from July 1, 2014 through June 30, 2015. The employer offers a QHP to its employees on 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 count premiums paid on behalf of each employee enrolled in coverage for the entire 2014 taxable year, 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 proposed regulations.
Q. What if there are no QHPs offered through a SHOP Marketplace in the county of my principal place of business?
A. 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 50 percent rate (35 percent 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.
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.
For a detailed description of this transition relief, see Notice 2014-6.
Q: What if an employer already claimed the credit for prior years? Can the employer still take advantage of the credit in 2014?
A. Yes, an eligible small employer may take the credit for tax years beginning in 2010 through 2013 without those years counting 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.
Q. 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?
A. Yes, a household employer may be eligible for the credit.
Q. How about an employer outside the U.S.?
A. 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.
Q. How are employer contributions to a multiemployer plan treated for purposes of the credit?
A. 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 Exchange.
Q. Can a section 521 farmers cooperative be eligible?
A. 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.
- Calculating the Credit
- Determining FTEs and Average Annual Wages
- How to Claim the Credit
- Transition Relief for Tax Years Beginning in 2010