Small Employers are not exposed to potential penalties under the ACA’s Employer Shared Responsibility (ESR) provisions like “applicable large employers” (ALEs) are for failing to provide affordable, minimum value health coverage to 95% of their full time employees. However, certain small employers may qualify for tax incentives if they do offer coverage. The credit may be claimed by eligible tax-exempt employers as well as by for-profit employers.
TIP: Under ESR provisions, a small employer is defined as one with fewer than 50 full-time employees plus full-time employee equivalents.
To qualify for the Small Employer Tax Credit, an employer must:
- have fewer than twenty-five (25) full-time equivalent employees (FTEs)
- pay average annual wages below $50,000.00 (the inflation-adjusted amount for 2015 and 2016 is $52,000)
- pay at least 50% of the premium for employee-only health insurance (and pay the same percentage for all employees)
- provide coverage through the Small Business Health Options Program (SHOP)Marketplace.
TIP: If you paid total annual wages of $200,000 in 2016 and had 10 FTEs, average annual wages were $20,000 (200,000 divided by 10).
TIP: The following workers are NOT counted in FTEs and average annual wages: the small employer business owner, family members who work for the small employer (including spouse, children, grandchildren, siblings or step-siblings, parents, grandparents, nieces or nephews, in-laws), seasonal workers (including retail workers employed exclusively during holiday seasons).
The tax credit is allowed for two consecutive years. The amount of tax credit depends on whether the small employer is “for profit” or “tax exempt,” and on what year the credit is claimed. It is also scaled pro rata, with the full tax credit available for employers with up to 10 employees and less for those with up to twenty five (25) employees:
- Up to 50% of premium costs for “for profit” employers
- Up to 35% of premium costs for tax-exempt employers
For tax years 2010 through 2013, the amount of the credit was 35% and 25%, respectively, for “for profit” and tax-exempt employers, and it applied to small group health insurance purchased inside or outside the SHOP Marketplace (the SHOP Marketplace was not in existence for most of those years). Since 2014, the tax credit has been available only to small employers who purchased coverage through the SHOP Marketplace. For information about insurance plans offered through the SHOP see www.healthcare.gov (if in Utah, see Avenue H at http://www.avenueh.com/ ; if in California, see CoveredCalifornia at http://www.coveredca.com/ForSmallBusiness/ ).
Even if a small employer did not owe tax for a particular year, it can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments (although both cannot be claimed on the same dollars).
If a small employer is tax-exempt, the credit is refundable, so even if there is no taxable income, an employer may be eligible to receive the credit as a refund so long as it does not exceed the amount of income tax and Medicare tax withheld for the year plus the Medicare tax paid by the employer. Refund payments issued to small tax-exempt employers claiming the refundable portion of credit are subject to sequestration. Find out more information on sequestration and answers to other questions at https://www.irs.gov/uac/small-business-health-care-tax-credit-questions-and-answers-calculating-the-credit
If a small employer can benefit from the credit but forgot to claim it, there’s still time to file an amended return. Refund limitations may apply. Generally, a claim for refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.
to calculate the credit. For detailed information on filling out the form, see the 2016 Instructions for Form 8941 at https://www.irs.gov/pub/irs-pdf/i8941.pdf. Include the amount as part of the general business credit on your income tax return. If a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T must be used in order to claim the credit, even if a tax exempt employer doesn’t ordinarily do so.