What You Need to Know about the Health Care Tax Credit
Posted on November 12, 2013
_From the health care reform experts at Accelerated Benefits
The Affordable Care Act (ACA) created a tax credit for certain small employers that provide health insurance coverage to their employees, effective with the 2010 taxable year.
The health care tax credit will continue to be available in 2014 and later taxable years. However, a few key aspects of the tax credit will change beginning in 2014. These changes include:
* An increase to the maximum amount of the credit
* A requirement that employers obtain group coverage through an Exchange
* A new two-year limit on taking the credit
On August 25, 2013, the IRS issued a proposed rule to provide guidance on the availability of the health care tax credit for 2014 and later taxable years. Employers may rely on the proposed rule for taxable years beginning after December 31, 2013 and before December 31, 2014. If future guidance on the health care tax credit is more restrictive, it will not be applied retroactively and employers will be provided with time to comply with the final guidance. In any case, employers will not be required to comply with any final guidance for taxable years beginning prior to January 1, 2015.
Here’s an overview of the changes to the small employer health care tax credit that will take effect for 2014:
Eligible small employers
To be eligible for the health care tax credit, an employer must:
* Have fewer than 25 full-time equivalent employees (FTEs)
* Pay average annual wages of less than $50,000 per FTE
* Maintain a “qualifying arrangement”
In general, for taxable years 2010-2013, a qualifying arrangement is one where the employer pays at least 50% of the premiums for each employee enrolled in its health insurance coverage.
Beginning with the 2014 taxable year, employers must purchase health insurance coverage for their employees under the Exchange’s Small Business Health Options Program (SHOP) to be eligible for the health care tax credit. The proposed rule provides that, beginning with the 2014 taxable year, a qualifying arrangement is one where the employer is required to pay a uniform percentage (at least 50%) of the premium cost of a qualified health plan (QHP) offered by the employer to its employees through a SHOP Exchange. The proposed rule provides transition relief for 2014 for employers with different plan years and taxable years. *Learn more about the uniform percentage requirement
Maximum amount of credit
The amount of the health care tax credit is calculated as a percentage of the nonelective contributions that the eligible small employer makes towards employees’ health insurance coverage. The maximum tax credit is only available to employers with 10 or fewer FTEs and average annual wages of $25,000 or less. Eligible small employers that exceed these thresholds receive a reduced tax credit.
For the 2010 through 2013 tax years, the maximum credit is 35% of premiums paid for taxable small employers and 25% of premiums paid for tax-exempt small employers. For 2014 and later taxable years, the maximum credit increases to 50% of premiums paid for taxable small employers and 35% of premiums paid for tax-exempt small employers.
In addition, the proposed rule provides that the amount of an employer’s premium payments that counts for purposes of the credit is limited by the average premium in the small group market in the rating area in which the employee enrolls for coverage through a SHOP Exchange. *Learn more about the maximum amount of credit
Credit period limit
Beginning in 2014, the health care tax credit is only available to an employer for two consecutive taxable years. The proposed rule provides that the first year of the two-year credit period is the first year for which an employer files with the IRS to claim the credit, and it cannot begin before the 2014 taxable year. So even if an eligible small employer receives the health care tax credit for taxable years prior to 2014, the credit will be available to the employer for two consecutive taxable years beginning, during or after the 2014 taxable year.
Taxable small employers use IRS Form 8941 (“Credit for Small Employer Health Insurance Premiums”) to claim the credit. Tax-exempt small employers use IRS Form 990-T (“Exempt Organization Business Income Tax Return”) and attach Form 8941 to claim the credit. *Learn more about the credit period limit
The proposed rule recognizes that, if an eligible small employer’s plan year begins on a date other than the first day of its taxable year, it may not be possible or practical for the employer to offer insurance to its employees through a SHOP Exchange at the beginning of its first taxable year beginning in 2014. The proposed rule provides a transition rule for employers that:
* As of August 26, 2013, offer coverage in a plan year that begins on a
date other than the first day of its taxable year
* Offer coverage during the period before the first day of the plan year beginning in 2014 that would have qualified the employer for the health care tax credit under the rules that apply to periods before January 1, 2014
* Begin offering coverage through a SHOP Exchange as of the first day of the plan year that begins in 2014
Small employers that satisfy these criteria will be treated as offering coverage through a SHOP Exchange for their entire 2014 taxable year for purposes of determining eligibility for the health care tax credit and calculating the credit. So for an employer that qualifies for the transition relief, the credit will be calculated at the 50% rate (35% rate for tax-exempt eligible small employers) for the entire 2014 taxable year, and the 2014 taxable year will be the start of the two-year credit period.
Accelerated Benefits is a benefits brokerage firm headquartered in Columbus, Ohio, that specializes in the "5 C's" of employee benefit programs: cost, compliance, communication, coordination and consultation. Accelerated Benefits offers benefit solutions to fit the unique needs of any size company. When your goal is to integrate, communicate, and simplify your employee benefit program, AccBen can lead the way.
This content is intended for educational purposes only and should not be considered legal advice.