Claiming the 2014 Small Business Health Care Tax Credit

The IRS has released the 2014 version of Form 8941, which can be used by eligible small employers to calculate the health care tax credit. Created as part of the Affordable Care Act (ACA), this credit generally is available to employers that:

• Have fewer than 25 employees,
• Pay average annual wages of less than $50,000 (indexed for inflation; see below), and
• Contribute a uniform percentage of at least 50% of the premium costs for employee health insurance coverage.

An arrangement with employer contributions of less than 50% for some employees may still qualify under certain circumstances, depending on how tiers of coverage are structured and whether composite billing or list billing is used. Once calculated, the tax credit is claimed as a general business credit on Form 3800 (or, by tax-exempt small employers, as a refundable credit on Form 990-T).

Key changes

Form 8941 and its instructions have been modified to reflect a number of key changes to the small business tax credit for 2014 and beyond. For starters, the maximum tax credit has increased to 50% of premiums paid (35% for tax-exempt eligible small employers).

In addition, now those premiums must be for qualified health plans offered through a Small Business Health Options Program (SHOP). But an exception is available for employers in identified Washington and Wisconsin counties without 2014 SHOP coverage. (Note that, for 2015, IRS Notice 2015-08 creates a new exception for employers in certain Iowa counties without 2015 SHOP coverage as well.)

Form 8941 now begins by asking: 1) whether premiums were paid through a SHOP, or 2) whether an exception applies. If the answer to both questions is no, taxpayers are instructed to stop and not file the form.

Also beginning with the 2014 tax year, the credit is available to eligible small employers for a maximum of two consecutive tax years. And, adjusted for inflation, average annual wages must be less than $51,000 for 2014. Although the inflation-adjusted threshold is technically $50,800, the rounding rule required for calculating average wages results in $51,000 being the effective limit for purposes of Form 8941.

More on the instructions

The instructions identify the information needed to calculate the tax credit. They also include worksheets to determine the number of employees, average wages and average premiums for the small group health insurance market for each state where an employer has employees.

More specifically, the instructions list average premiums, by county, for all 50 states plus the District of Columbia — which is relevant because an employer’s health care tax credit may be reduced if the employer pays premiums greater than the average for the small group market for the state in which its employees work.

Furthermore, detail has been added to the instructions on the treatment of contributions paid toward wellness programs, tobacco surcharges and dependent coverage to reflect the 2014 final regulations. 

An attractive incentive

Despite outreach efforts by the IRS and the Department of Health and Human Services, employers have not claimed the small business health care tax credit as much as expected or hoped. The 2014 changes won’t likely change this. The wage thresholds remain difficult for many small companies to meet, and the limited availability of SHOP coverage in many parts of the country presents another challenge.

Yet, for small employers that do qualify, the increase to a maximum 50% credit makes this an attractive incentive — even in light of the two-consecutive-year limit. If you think your small business may qualify for the credit, work with your tax advisor to carry out the process of claiming it.

© 2015