Small Business Health Insurance Credit

The 2010 Patient Protection and Affordability Act created a tax credit to reimburse qualifying employers for up to 50% of health insurance premiums (this increased from 35% in 2014) paid for their employees.  The credit is called the “Small Employer Health Care Credit” and is calculated using Form 8941.  Although the credit can be quite substantial for employers who qualify, calculating the credit can be so confusing, complex, and time-consuming that many employers simply throw their hands up and abandon the credit entirely.  In this article, I’ll lay out a basic framework of the Small Employer Health Insurance Credit as it applies to businesses (the credit is also available to small tax-exempt employers, although the credit amount and rules are slightly different).  My goal is to cut through some of the confusion surrounding the credit to help employers decide whether or not to invest their time pursuing the credit.

Businesses that qualify for Small Employer Health Insurance Credit must meet three basic criteria:

  1. Employ less than 25 “full-time equivalent” (FTE) employees,
  2. Pay these FTEs an average salary/wage of less than $50,000 per year, and
  3. Pay at least 50% of each FTEs single-rate, annual health care premiums. 

There are four questions a business must answer to determine whether or not it qualifies for the credit. 

  1. Which employees qualify for the credit?  Only hours, wages, and insurance premiums of “qualifying employees” are considered when calculating the Small Employer Health Insurance Credit.  Qualifying employees include all employees employed by the business except; 1) owners, partners, or shareholders who have 2% ownership or greater, 2) family members and relatives of these owners, and 3) seasonal workers who work less than 121 days during the tax year. 
  2. Does the business employ less than 25 FTE’s?  The number of “full-time equivalent” employees is the number of employees the employer would have if the total hours were worked by all qualifying employees were worked by full-time employees.  To calculate the number of FTEs, take the total number of hours worked by all “qualifying employees” (determined in question number one) during the tax year (include hours for paid holidays, vacations, and sick leave) up to 2,080 hours per employee.  Then, take that total, divide by 2,080, round the answer up to the next whole number, and you have determined the number of FTEs.
  3. Does the business pay each FTE less than $50,000 per year?  The average wage per FTE is calculated by taking the total wages paid to FTEs during the tax year, dividing it by the total number of FTEs, then rounding down to the nearest $1,000.  Beginning in 2014, the $50,000 limit will be adjusted for inflation.
  4. Does the business pay at least 50% of employees’ insurance premiums? To qualify for the credit, employers must utilize a “qualifying arrangement” to pay at least 50% of qualifying employees’ individual (not family) health insurance premiums.  Making this determination is a bit more complex than space will allow but, basically, a qualifying arrangement exists if the employer pays a “uniform percentage” (the same percentage of each employees’ premiums) of at least 50% of single-rate premiums.

    Beginning in 2014, qualifying employees must also be covered by a Qualified Health Plan (as defined by the Affordable Care Act) offered through a Small Business Health Options Program (SHOP Marketplace) to qualify for the credit.

There are two other items to consider when determining whether or not a business qualifies for the tax credit:

  1. The per-employee insurance premiums are capped by the average premium paid for “small group” coverage in the employer’s state (or geographic area).  The premium amount employers must use is the lesser of: 1) the single-rate premium actually paid for the employee or the amount listed on the premium cap.  And,
  2. Only premiums actually paid by the employer qualify for the credit. 

One important item to note is the fact that many employers who qualify will not receive the full 50% credit.  The credit is skewed so only businesses who employee 10 FTEs or less who earn an average of $25,000 or less annually will receive the maximum credit.  The credit rapidly decreases once the number of FTEs exceeds 10, or the average wage exceeds $25,000.  The credit disappears entirely when there are more than 24 FTEs and/or an average annual wage equals or exceeds $50,000.

This article offers an outline to help business owners determine whether pursuing the Small Employer Health Insurance Credit is worth the effort.  As always, the tax information provided by this or any article should never replace professional tax consultation.  If you should have any questions regarding your business or personal taxes, please feel free to contact our office at (304) 267-2594 to speak with a tax professional.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.