Academic journal article Journal of Accountancy

Claiming the Small Employer Health Insurance Tax Credit: Make This Complex but Potentially Beneficial Calculation

Academic journal article Journal of Accountancy

Claiming the Small Employer Health Insurance Tax Credit: Make This Complex but Potentially Beneficial Calculation

Article excerpt

The small employer health insurance tax credit under Sec. 45R was enacted by the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, to help small businesses and small Sec. 501(c) tax-exempt organizations afford the cost of providing health insurance coverage for their employees. However, many potentially eligible employers that have gone through the relatively complex credit calculation have been dismayed to find that they were eligible only for a small credit or none at all. Because the maximum potential credit increased for 2014, employers that take the time to make the calculation may find that they are eligible for a substantially larger credit than in prior years.

The credit is specifically targeted toward employers with low- and moderate-income workers. All employers treated as a single employer under Sec. 414(b), (c), (m), or (o) (e.g., in controlled groups or entities under common control) must be aggregated and treated as a single employer for credit purposes.

To be eligible, an employer must:

* Pay premiums for employee health insurance under a qualifying arrangement;

* Have fewer than 25 full-time-equivalent employees (FTEs) for the tax year; and

* Pay average annual wages of less than $50,000 per FTE (inflation-adjusted to $50,800 for tax years beginning in 2014).

A qualifying arrangement, further described below, generally is one in which the employer pays at least 50% of the premium cost for single (employee-only) coverage.

Phase I. For tax years 2010 through 2013, the maximum credit was 35% of the employer's contribution toward the employees' health insurance premiums (25% for nonprofits).

Phase II. For tax years 2014 and later, the maximum credit is 50% of the employer's contribution toward the employees' health insurance premiums (35% for nonprofits). The credit is available for a maximum of two years. In addition, employers must obtain the insurance through the Small Business Health Options Program (SHOP), a feature of the health benefit exchanges, or "marketplaces," that states and the federal government have established under PPACA.

An employer's eligible premium contribution is limited to the average cost of health insurance for the small group market in the employer's state or an area of the state (see Prop. Regs. Sec. 1.45R-3(b)). The average premium for the small group market is determined by the Department of Health and Human Services (HHS). After HHS sets the rate for a state (or within a state), it is published on the IRS website (irs.gov) and included in the instructions for Form 8941, Credit for Small Employer Health Insurance Premiums.

The credit phases out as average annual wages increase between $25,000 and $50,000 ($25,400 and $50,800 for 2014) and/or average FTEs increase between 10 and 25.

The credit is claimed using Form 8941. It is part of the general business credit, unused portions of which can be carried back one year and forward 20 years. The credit can be applied to both regular taxes and the alternative minimum tax.

The employer must reduce its health insurance premium expense deduction under Sec. 162 by the amount of the credit.

For tax-exempt small employers, the credit is also calculated on Form 8941 and is attached to Form 990-T, Exempt Organization Business Income Tax Return. The credit is refundable and limited to the payroll taxes (federal income taxes withheld, Medicare taxes withheld, and employer Medicare taxes paid) for the tax year.

PRACTICAL TIPS FOR CALCULATING THE CREDIT

Calculating the credit can be extremely complex and cumbersome, and often it does not seem cost-effective. However, as financial advisers, CPAs need to attempt to calculate the credit whenever possible. They can often rule out an employer's eligibility with a quick calculation of average wages or FTEs before requesting the amount of insurance premiums paid. …

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