Small Employer Tax Credit: Summary

The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010.

What Employers are Eligible for the Small Employer Tax Credit?
  • Must have fewer than 25 full-time equivalent employees (FTEs)
  • Must have average annual wages less than $50,000 per FTE
  • Must pay premiums under a qualifying arrangement

Who are FTEs?
  • Count/aggregate all employees who perform services
  • Include leased employees, employees in controlled group, seasonal employees (if work >120 days), former employees, collectively bargained employees, employees not in health plan
  • Divide total hours of all employees' service by 2,080 (round to next nearest lowest whole number)

What are Average Annual Wages?
  • Total wages (including overtime) divided by the number of FTEs (round down to nearest $1,000)

What is a Qualifying Arrangement?
  • Must pay uniform percentage of premium (no less than 50%) for each enrolled employee
  • Transition relief for 2010
  • Can satisfy requirement even if % of premiums paid isn't uniform for all employees, as long as employer pays at least 50% of premium for each employee enrolled (relief uses premium for employee-only coverage when applying the requirement)

What Premium is Included when Calculating Credit?
  • Limited to average premium for small group market in State offering coverage (See IRS Guidelines)
  • Limited to premium paid by employer
  • DO NOT count premiums paid per pre-tax salary reduction
  • DO NOT count contributions to health FSA, HRA or HSA
  • DO NOT include premium for excludable individuals (business owners, partners and family members)
  • Include all premiums paid in 2010 tax year

How do you Calculate Credit?
  • Calculate maximum amount of credit
  • For taxable employers max is 35% (50% in 2014)
  • For tax-exempt employers max is 25% (35% in 2014)
  • Reduce maximum credit in accordance with phase-out, if necessary
  • Full credit only allowed if 10 or less FTEs and average annual wages of $25K or less
  • Determine actual premium payment if receiving state subsidy/credit

How do you Claim Credit?
  • Taxable employers: attach Form 8941 to annual income tax return
  • Tax-exempt employers: attach Form 8941 to Form 990-T
  • Can claim credit if no taxable income for year