As we have previously advised you, the Affordable Care Act (“the ACA”) imposes a “pay or play” mandate on employers with 50 or more full-time and full-time equivalent employees.  In general, this provision requires these employers to provide affordable health insurance to at least 95% of their full-time employees or pay a penalty.  The ACA encourages small employers; i.e., those with fewer than 25 full-time employees, to offer health insurance by providing them with a tax credit.  This memorandum provides a summary of the small business tax credit provision.

Eligibility

In order for a small employer to be eligible for the tax credit, it must meet three requirements:  (i) the employer must have fewer than 25 full-time employees or a combination of full-time and part-time (two half-time employees are equivalent to one employee for purposes of the credit); (ii) the average annual wages of all employees must be less than $50,000; and (iii) the employer must pay a uniform percentage for all employees enrolled in coverage that is equal to at least 50% of the insurance premium.  Beginning in 2014, an employer must offer health insurance to its employees through the Small Business Health Options Program Exchange to qualify for the credit.

Amount of the Tax Credit

For 2013, the maximum credit is 35% of premiums paid for small non-tax-exempt employers and 25% of premiums paid for small tax-exempt employers.  Beginning in 2014, the maximum credit amount increases to 50% for eligible small non-tax-exempt employers and 35% for small tax-exempt eligible employers.  The amount of credit an employer may receive depends on the employer’s number of employees and the average annual wages paid. 

Claiming the Tax Credit

A small non-tax-exempt employer must claim the credit on its annual income tax return, with an attached Internal Revenue Service (“IRS”) Form 8941, Credit for Small Employer Health Insurance, showing the calculation of the credit.  Small tax-exempt employers may claim the credit by filing IRS Form 990-T, Exempt Organization Business Income Tax return, with an attached IRS Form 8941 showing the calculation of the claimed credit.

Please contact us if you have any questions about the ACA’s small business tax credit.

THIS MEMORANDUM IS MEANT TO ASSIST IN GENERAL UNDERSTANDING OF THE CURRENT LAW.  IT IS NOT TO BE REGARDED AS LEGAL ADVICE.  THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL.

© Lamb & Barnosky, LLP 2013

1. To determine the number of full-time employees, an employer must add up the total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee), and divide that amount by 2,080.  If the result is not a whole number, the employer should round to the next lowest whole number. 

2. All wages paid to employees (including overtime pay) are taken into account in computing an employer’s average annual wages.