What Is the Small Business Health Care Tax Credit?

By: Clayton H. Collins, Esq.

The small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or to maintain coverage they already have.

Am I Eligible?

A broad range of employers meet the eligibility requirements, including small employers that cover their workers through insured multiemployer health and welfare plans and employers that subsidize their employees’ health care costs through various contribution arrangements.

In general, the credit is available to an employer who:

(1) Has fewer than 25 full-time equivalent employees (FTEs);

(2) Pays an average annual wage of less than $50,000 per FTE; and

(3) Pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (not less than 50%) of the premium cost of the coverage.

How Much Credit Can I Claim?

Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by eligible small businesses and 25% of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50% of premiums paid by eligible small business employers and 35% of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers – those with 10 or fewer FTEs – paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

How Do I Claim the Credit?

Eligible small businesses should use Form 8941 to calculate the credit and then include the amount of the credit as part of the general business credit on their income tax return.

Tax-exempt organizations should use Form 8941 to calculate their refundable credit, and then claim the credit on Line 44f of Form 990-T. Though primarily filed by those organizations liable for the tax on unrelated business income, Form 990-T should also be used by any eligible tax-exempt organization to claim the credit, regardless of whether they are subject to this tax.

Clay Collins is an associate at Leech Tishman and practices in the Estates & Trusts, Insurance Coverage & Corporate Risk Mitigation and Construction Practice Groups. Clay can be reached at 412.261.1600 x 234 or ccollins@leechtishman.com. Please feel free to contact Clay with any questions about the small business health care tax credit. For more information on the Employment Practice Group, please click here.

Leech Tishman is a firm dedicated to providing full-service commercial legal services to individuals, businesses, and institutions. We combine a deep understanding of our clients and their businesses with skilled legal counsel to find solutions. We offer legal services in alternative dispute resolution, bankruptcy & creditors’ rights, construction, corporate, employment, energy, environmental, safety & toxic torts, estates & trusts, government relations, insurance coverage & corporate risk mitigation, litigation, real estate, and taxation. For more information call 412.261.1600 or visit www.leechtishman.com.