Back in 2010, the healthcare reform law created the Small Business Health Care Tax Credit to help employers provide insurance to their workforces. In 2014, the credit becomes a lot more substantial.
For starters, the maximum credit will increase to 50% of the premiums small employers pay toward their employees’ health insurance premiums. That’s a big increase from the 35% max the credit’s been slated to pay out for tax years 2010 through 2013.
The maximum credit for tax-exempt organizations will also climb dramatically — from 25% to 35% in 2014.
Also making it more attractive, albeit only slightly, is the fact that the average employee salary limit ($50,000) employers need to stay under to qualify for the credit will be indexed for inflation, and will likely be on the rise.
Some other modifications to the credit:
- Employers will only be eligible for the credit if they purchase health insurance through the new Small Business Health Options Program, which is a component of the health exchanges established under Obamacare
- The credit will be based on the lesser of the employer’s actual premium payments or the average premiums in the small group market the employer is subject to (previously, the credit was based only on the amount paid by the employer), and
- The credit will only be available for two consecutive tax years.
Do you qualify?
To be eligible for the credit, your company must:
- Employ fewer than 25 full-time equivalent (FTE) employees
- Pay average annual wages of less than $50,000 per FTE, and
- Pay at least 50% of the premiums for FTEs’ health coverage.
Employers with less than 10 FTEs and average annual wages of $25,000 or less are eligible for the full credit. The credit then begins to phase out for larger and more highly compensated workforces.
Small employers who didn’t owe taxes during the year can carry the credit back or forward to other tax years. And employers can still claim a tax deduction for the health insurance premiums paid in excess of the credit, according to the IRS.
As for tax-exempt organizations, they can receive the credit as a refund as long as it doesn’t exceed their income tax withholding and Medicare tax liability.
How do you apply?
All employers must use Form 8941 to calculate their credit (instructions are available here). From there, non-tax-exempt employers can claim the credit as part of the general business credit on their income tax return.
Tax-exempt organizations must use Form 990-T (line 44f) to claim the credit.
This post originally ran on our sister website, HRBenefitsAlert.com.