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Small Business Employee Benefits and HR Blog

Small Business Health Care Tax Credit FAQs - 2013

January 30, 2013

Nearly three years ago, the President signed the Affordable Care Act into law. As a result, your small business could be eligible for a health care tax cut in 2013. Here are some FAQs to help small businesses determine if they are eligible for the credit this year.

What expenses count in 2013?

Only premiums paid by the employer under a qualified arrangement count. The employer must pay at least 50 percent of coverage. If the employer provides more than one type of coverage or if the employer’s health insurance provider does not charge the same premium for all enrolled employees, the employer may qualify even if he or she paid less than 50 percent of the premium cost for some employees.small business health care tax credit

See section III.G of Notice 2010-82 for more guidance. 

For tax year 2013, only premiums paid to a health insurance issuer, such as an insurance company or HMO, count for purposes of the credit. Premiums for insurance that covers a wide variety of conditions, such as a major medical plan, and premiums for coverage that is more limited in scope, such as dental or vision, also count. But if an employer offers more than one type of coverage, the employer must satisfy the requirements separately for a qualifying arrangement (the employer cannot aggregate these different plans to meet the qualifying arrangement requirement). Also, employer contributions to health reimbursement arrangements (HRAs), health flexible spending arrangements (FSAs) and health savings accounts (HSAs) are not taken into account for purposes of the credit. 

For a detailed description of the types of coverage that are counted for the credit, see section II.G of Notice 2010-44.      

If an employer pays only a portion of the premiums and employees pay the rest, the amount counted to calculate the credit is only the portion paid by the employer.  For example, if an employer pays 80 percent of the premiums, and employees have the other 20 percent taken out of their pay, only the 80 percent paid by the employer counts. 

In addition, the amount of an employer’s premium payments that counts is capped.  The employer’s premium payment may not be more than the average premium for the small group market in the state where the employer offers coverage. If an employer pays 80 percent of the premiums, what counts is the 80 percent paid by the employer or 80 percent of the small group market average — whichever is less.  The average premium for the small group market does not apply separately to each type of coverage the employer offers; it provides an overall cap for all coverage provided by the employer. See the “What is the average premium for the small group market in a state?” question on this page for information on the average premium for the small group market in a state.

To help explain, here are six examples.  Remember, the tax is based on “full-time equivalents” (FTEs) — that is, two half-time employees would equal one full-time employee.

Example 1: For the 2013 tax year, a qualified employer has nine FTEs with average annual wages of $23,000. Six employees are enrolled in single coverage and three employees are enrolled in family coverage. The premiums are $8,000 for single coverage for the year and $14,000 for family coverage. The employer pays 50 percent of the premium for single coverage for each employee enrolled in single or family coverage (50 percent x $8,000 = $4,000 for each employee).

Number of employees

Type of Coverage

Total Premiums

Employer pays

6

Single

8,000

4,000

3

Family

14,000

4,000

Thus, the employer pays $4,000 of the premium for each of the six employees enrolled in single coverage and $4,000 of the premium for each of the three employees enrolled in family coverage. The employer satisfies the uniformity requirement.

Example 2: We use the same facts as in Example 1, except that the employer pays 50 percent of the premium for employees enrolled in single coverage ($4,000 for each of those six employees) but pays none of the premium for employees enrolled in family coverage. 

Number of employees

Type of Coverage

Total Premiums

Employer pays

6

Single

8,000

4,000

3

Family

14,000

0

The employer does not satisfy the uniformity requirement.  

Example 3. For the 2013 tax year, a qualified employer offers a health insurance plan with single and family coverage. The employer has nine FTEs with average annual wages of $23,000. Four employees are enrolled in single coverage and five are enrolled in family coverage. 

The employer pays 50 percent of the premiums for all employees enrolled in single coverage and 50 percent of the premiums for all employees enrolled in family coverage. The employee is responsible for the remainder in each case. The premiums are $4,000 a year for single coverage and $10,000 a year for family coverage. The average premium for the small group market in the employer’s state is $5,000 for single coverage and $12,000 for family coverage. 

The employer’s premium payments for each FTE ($2,000 for single coverage and $5,000 for family coverage) do not exceed 50 percent of the average premium for the small group market in the employer’s state ($2,500 for single coverage and $6,000 for family coverage). 

Number of employees

Type of Coverage

Total Premiums

State Avg Premium

Employer pays 50%

4

Single

4,000

5,000

2,000

5

Family

10,000

12,000

5,000

Thus, the amount of premiums paid by the employer for purposes of computing the credit equals $33,000 [(4 x $2,000) plus (5 x $5,000)].

Example 4: Assume the same facts as in Example 3, except that the premiums are $6,000 for single coverage and $14,000 for family coverage and the employer pays 50 percent of these amounts. 

The employer’s premium payments for each employee ($3,000 for single coverage and $7,000 for family coverage) exceed 50 percent of the average premium for the small group market in the employer’s state ($2,500 for single coverage and $6,000 for family coverage). 

Number of employees

Type of Coverage

Total Premiums

State Avg Premium

Employer pays 50%

50% of State Avg Premium

4

Single

6,000

5,000

3,000

2,500

5

Family

14,000

12,000

7,000

6,000

The amount of premiums paid by the employer for purposes of computing the credit equals $40,000 [(4 x $2,500) plus (5 x $6,000)].         

Example 5: For the 2013 tax year, a qualified employer offers a major medical plan and a dental plan. The employer pays 50 percent of the premium cost for single coverage for all employees enrolled in the major medical plan and 50 percent of the premium cost for single coverage for all employees enrolled in the dental plan.

For purposes of calculating the credit, the employer can count the premiums paid for both the major medical and the dental, but only up to the 50 percent cap — an amount equal to 50 percent of the small market average.      

Example 6: The employer pays 40 percent of the premium cost for single coverage for all employees enrolled in the dental plan. 

The employer cannot take into consideration premiums paid for the dental plan because he did not pay at least 50 percent of the premium.  

What is the average premium for the small group market in a state, and where can employers find the average premiums for 2013?

The IRS publishes the information for calculating the credit in the Instructions for Form 8941, Credit for Small Employer Health Insurance Premiums, each year. The IRS works with the Department of Health and Human Services to obtain the average premium figures for the Small Employer Health Care Tax Credit each year.   

What if an employer has employees in multiple states?

The employer applies the average state premium for each employee based on the state where the employee works.

What is the maximum credit for a qualified employer who is not tax-exempt in 2013?

For the tax year 2013, the maximum credit is 35 percent of the employer’s eligible premium expenses. See the “What expenses count?” question on this page.

What is the maximum credit for a tax-exempt qualified employer in 2013?

For tax year 2013, the maximum credit is 25 percent of the employer’s qualified premium expenses. However, the amount of the credit cannot be more than the total amount of income and Medicare tax (i.e., hospital insurance) the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages for the year. 

How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?

Formulas help determine the effect of having more than 10 FTEs or average annual wages that exceed $25,000. For each FTE above 10 the credit is reduced by 1/15. For each $1,000 above $25,000 in average annual wages the credit is reduced by 1/25.   

Example 1 (for qualified employers that are NOT tax-exempt organizations): For the 2013 tax year, the employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees, which does not exceed the average premium for the small group market in the employer's state. 

For eligible employers that are NOT tax-exempt organizations, the credit is calculated as follows:

(1) Initial amount of credit determined before any reduction: (35 percent x $96,000) = $33,600    
(2) Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
(3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
(4) Total credit reduction: ($4,480 + $6,720) = $11,200
(5) Total 2013 tax credit: ($33,600 – $11,200) = $22,400

Example 2 (For qualified employers that ARE tax-exempt organizations): For the 2013 tax year, the employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees, which does not exceed the average premium for the small group market in the employer's state. The total amount of the employer’s income tax and Medicare tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2013.   

For eligible employers that ARE tax-exempt organizations the credit is calculated as follows:

(1) Initial amount of credit determined before any reduction: (25 percent x $96,000) = $24,000    
(2) Credit reduction for FTEs in excess of 10: ($24,000 x 2/15) = $3,200
(3) Credit reduction for average annual wages in excess of $25,000: ($24,000 x $5,000/$25,000) = $4,800
(4) Total credit reduction: ($3,200 + $4,800 = $8,000)
(5)  Employer’s withholding and Medicare taxes: $30,000
(6) Total 2013 tax credit: ($24,000 – $8,000) = $16,000 (the lesser of $16,000 and $30,000).

What effect do state credits and state subsidies for health insurance have on the amount of the federal health care tax credit?

Some states offer tax credits or a premium subsidy to certain small employers who provide health insurance to their employees. Generally, the premium subsidy is in the form of direct payments to the employer or to the employer’s insurance company.  The effect these credits and subsidies on an employer’s federal health care tax credit depends on whether the direct payment goes to the employer or the insurance company.

If a state tax credit or a premium subsidy is paid directly to the employer, the effect on calculation of the federal health care tax credit in general is zero.

If a state makes payments directly to an insurance company, the state is treated as making these payments on behalf of the employer. That may affect whether the employer is still paying 50 percent of workers’ health insurance costs.

State payments aside, the federal health care tax credit cannot exceed the amount of the employer’s net premium payments. In the case of a state tax credit for an employer or a state subsidy paid directly to an employer, the employer’s net premium payments are calculated by subtracting the state tax credit or subsidy from the employer’s actual premium payments. In the case of a state direct payment to an insurance carrier, the employer’s net premium payments are the employer’s actual premium payments. 

A state-administered program (such as Medicaid) may make payments directly to a health care provider or insurance company on behalf of eligible individuals and their families. Those payments are not taken into account in determining the employer’s federal health care tax credit.  

Example 1: (i) The employer’s state provides a health insurance premium subsidy of up to 40 percent of the health insurance premiums for each eligible employee. The state pays the subsidy directly to the employer. 

The employer has one employee, Employee D. Employee D’s health insurance premiums are $100 per month and are paid as follows: $80 by the employer and $20 by Employee D through salary reductions under a cafeteria plan. The state pays employer $40 per month as a subsidy.

For purposes of calculating the amount of the federal health care tax credit, the amount of premiums paid by the employer is $80 per month.

Example 2: The employer’s state provides a health insurance premium subsidy of up to 50 percent for each eligible employee. The state pays the premium directly to the employer’s health insurance provider. 

The employer has one employee. The employee is enrolled in single coverage under the employer’s health insurance plan. 

The employee’s health insurance premiums are $100 per month and are paid as follows: $30 by the employer; $50 by the state and $20 by the employee. The state pays the $50 per month directly to the insurance company and the insurance company bills the employer for $50 per month (the sum of the employer and employee’s share).

For purposes of determining whether the employer meets the requirements for a qualifying arrangement, and for purposes of calculating the amount of the federal health care tax credit, the amount of premiums paid by the employer is $80 per month (the sum of the employer’s payment and the state’s payment, which is treated as having been made on behalf of the employer). 

Example 3: The employer’s state provides a health insurance premium subsidy of up to 50 percent for each eligible employee. The state pays the premium directly to the employer’s health insurance provider. 

The employer has one employee. The employee is enrolled in single coverage under employer’s health insurance plan. 

The employee’s health insurance premiums are $100 per month and are paid as follows: $20 by the employer; $50 by the state and $30 by the employee. The state pays the $50 per month directly to the insurance company and the insurance company bills the employer for $50 per month (the sum of the employer’s and employee’s shares). 

The amount of premiums paid by the employer is $70 per month (the sum of the employer’s payment and the state’s payment, which is treated as having been made on behalf of the employer), which is more than 50 percent of the $100 monthly premium payment. The amount of the premium for calculating the maximum federal health care tax credit is also $70 per month. The maximum credit is $24.50 ($70 x 35%). 

The employer’s net premium payment is $20 (the amount actually paid by the employer excluding the state subsidy). After applying the limit for the employer’s net premium payment, the federal health care tax credit is $20 per month (the lesser of $24.50 or $20).

Do church welfare benefit plans qualify?  

A. When a small church employer — that is qualified in other respects — pays premiums for employees under a church welfare benefit plan, that may be a qualifying arrangement for purposes of the credit.

Source: IRS.gov

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