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.

• 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

• 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)

• Total wages (including overtime) divided by the number of FTEs (round down to nearest $1,000)

• 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)

• 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

• 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

• 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