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Health Care Reform Creates Changes to the Small Business Health Care Tax Credit

If you're a small business employer, you may be able to take advantage of the changes to the Small Business Health Care tax credit provided by the Affordable Care Act. To claim the tax credit, you must be an eligible small business employer who contributes at least 50% of the premium cost of a qualifying health plan. For 2014 and 2015, the coverage must generally be purchased through a SHOP Exchange with a few exceptions. For all years the employee health care premiums must be offered under a qualifying arrangement in which the employer pays a uniform percentage - not less than 50% - of the premium cost of each enrolled employee's health insurance coverage. The Credit for Small Employer Health Insurance Premiums is claimed on IRS Form 8941.

Qualified small business employer

To qualify as an eligible small business employer, you must employ fewer than 25 full-time equivalent employees (FTEs) during the taxable year, and your employees must have annual full-time equivalent wages that average less than $51,000 (for 2014) or $52,000 (for 2015). The full amount of the credit is available only if you have 10 or fewer FTEs whose average annual full-time equivalent wages is not more than $25,000.

Full-time equivalent employees

Calculate your FTEs by totaling all hours worked by all your employees during the tax year, and dividing the result by 2080. For purposes of the calculation, the maximum number of hours that can be attributed to an individual employee is 2080. Certain employees, such as a more than 5% shareholder or a business owner, and dependent family members may be excluded. Seasonal employees are also excluded if they worked 120 or fewer days during the taxable year. 

Average full-time equivalent wages

To determine annual full-time equivalent wages, divide the total wages paid for the year, divided by the number of FTEs, rounding the result down to the next lowest $1,000. \

Maximum credit

The maximum credit for years 2010 through 2013 is equal to 35% of the amount of contributions you made on behalf of employees during the taxable year for qualifying health coverage.

Beginning in 2014, the maximum credit is equal to 50%, determined in the same manner as in years prior to 2014. However, the credit is only available if you purchase employee health insurance coverage through a SHOP Exchange. The credit is available for a maximum coverage period of two consecutive years, beginning with the first year in which you offer one or more qualified plans to your employees through an exchange.

Sliding scale tax credit

The tax credit is reduced if you have more than 10 FTEs and/or if the average annual wages exceed $25,000.

If you have more than 10 FTEs, the credit reduction is determined by multiplying the amount of the maximum credit by the number of FTEs exceeding 10, then dividing this total by 15.

If your average annual wages exceeds $25,000, the credit reduction is calculated by multiplying the maximum credit amount by the average annual wages in excess of $25,000, then dividing this total by $25,000.

If you have more than 10 FTEs and average annual wages in excess of $25,000, the credit reduction is the sum of the total of the two reductions.

Example: You have 11 FTEs with average annual wages of $30,000, and your premium cost for the year is $100,000. To determine the reduced credit:

  1. Maximum credit before reduction: (35% x $100,000) = $35,000
  2. Credit reduction for FTEs exceeding 10: ($35,000 x 1/15) = $2,333
  3. Wages exceeding $25,000: ($35,000 x $5,000/$25,000) = $7,000
  4. Total credit reduction: ($2,333 + $7,000) = $9,333
  5. Total credit: $25,667 ($35,000 - $9,333)

Tax-exempt organizations

The tax credit is also available if you are a 501(c) organization exempt under IRC Section 501(a). However, the credit percentage for 2010, 2011, 2012, and 2013 is 25% (rather than 35%), and the credit percentage for taxable years beginning in years 2014 and later is 35% (rather than 50%). You can only apply the tax credit against your liability for payroll taxes.