ACA’s small business credit can be a real benefit
But many firms are not aware of what it can mean to their bottom line
Under the Affordable Care Act, certain small employers are entitled to a tax credit when the employer pays a specific amount of premium for an employee’s health coverage. This applies to both for-profit and not-for-profit employers. But in a recent survey done by Covering New Hampshire, which is a resource that helps New Hampshire residents learn about the health insurance marketplace, many employers who are eligible to utilize the Small Employer Health Insurance Tax Credit are unaware that the benefit exists.
Here are five things small businesses need to know so they can take advantage of the credit.
1. The requirements are not overly restrictive.
If your business employs no more than 25 full-time equivalent employees (FTE) for a taxable year, provides an average annual wage per FTE of less than $50,800 and contributed at least 50 percent of the cost of the health premium on behalf of each enrolled employee, then you are eligible to apply for the tax credit.
When counting your FTEs, do not count self-employed individuals, 2 percent S corporation shareholders, 5 percent owners or certain family members in the business, including children, siblings, parents, nieces and nephews, or in-laws. To do the math for calculating FTEs, count up to 2,080 hours of service for which wages were paid for each employee during the year, then divide that total by 2,080 (the equivalent of a 40-hour work week). The result is the number of FTEs. Employers may find that they have more than 25 employees, but still have fewer than 25 FTEs.
Controlled group rules apply, so employees in a controlled group of corporations count as one employer, as do employers who are members of an affiliated service group, or are partnerships under common control.
2. The credit, up to a maximum of 50 percent of the premium for-profit employers and 35 percent for tax-exempt employers, is a significant savings. With health care costs escalating, any possible way to save money is appreciated, especially so for small businesses. The 50 percent credit phases out above a $25,400 wage threshold, or above a 10 FTE threshold. So the sweet spot for this credit is the employer with 10 or fewer FTEs who are low to moderate wage-earners.
3. The credit is still available for a two-consecutive-year period. So to get the benefit employers must act now. The credit has been available since 2010. The remaining credit period begins with the first taxable year in or after 2014 in which the eligible employer claims the credit using Form 8941, “Credit for Small Employer Health Insurance Premiums,” by attaching the form to its income tax return. (For a tax-exempt eligible small employer, the Form 8941 is filed as an attachment to the Form 990-T, Exempt Organization Business Income Tax Return.) Even if an employer claimed the credit in prior years, the credit is still available for an additional two consecutive years.
4. For 2014 and later years, employers must purchase coverage through the SHOP Exchange to be eligible for the credit. In 2014, to be eligible, employers must purchase health coverage through the Small Business Health Options Program, or SHOP Exchange. In New Hampshire, we are not currently able to purchase SHOP Exchange insurance online. However, SHOP access is available by “direct enrollment,” using paper applications with the help of an insurance agent or broker. This direct enrollment limitation will change in later years, as the SHOP Exchange goes live online.
5. To get assistance in purchasing health coverage under the SHOP Exchange, use your payroll service, accountant or attorney to assist. Accountants and other record-keepers can often assess an employer’s threshold eligibility quickly by calculating average wages or FTEs before addressing the amount of insurance premiums paid. After the first year’s calculation, the next year’s return should be easier to complete.
The Small Employer Tax Credit will benefit eligible small employers who will or already provide health insurance to their employers. The savings can make it worth the time it takes to make the calculation.
Patricia M. McGrath is a shareholder of Devine Millimet who focuses her practice in pension and benefits law and trusts and estates work.