Small business tax credit proposed rule issued
Oct. 15, 2013
On August 23, the Department of Treasury and the IRS issued proposed regulations on the tax credit available to small employers that offer health insurance coverage to their employees. The credit helps small businesses and small tax-exempt organizations afford the cost of coverage for their employees.
Some highlights of the small business tax credit (SBTC) are:
- Credits are available to eligible small employers of up to 25 full-time equivalent employees (FTEs) that pay an average annual wage of less than $50,000.
- Full credit is available to eligible small employers of up to 10 FTEs with an average annual wage of $25,000 or less.
- Maximum credit is 50 percent of employer's contribution to the health care benefits (35 percent for tax-exempt employers).
- In order to qualify, eligible small employers must offer qualified health plans through the Marketplace Small Business Health Options Program (SHOP).
- Credits are only available for two consecutive taxable years, beginning the first year the employer offers coverage through SHOP.
- Employers generally must pay a uniform percentage, not less than 50 percent, of the premium for each employee.
- The rule applies to taxable years beginning after December 31, 2013.
Calculating the credit
For purposes of calculating the credit, hours and wages of employees for eligibility of the SBTC, the following individuals are NOT considered employees: independent contractors (including sole proprietors); partners in a partnership; shareholders owning more than two percent of an S corporation; owners of more than five percent of other businesses; family members of these owners and partners including: a child (or descendant of a child); a sibling or step sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; a son-in-law or daughter-in-law; a father-in-law or mother-in-law; a brother-in-law or sister-in-law; a spouse ; or a member of the household who is not a family member but qualifies as a dependent on the individual income tax return of an excluded individual
Seasonal workers who work 120 or fewer days during the taxable year are not counted toward FTE and annual wages, but premiums paid on their behalf are counted in determining the amount of the credit.
Determining Hours of Service
Hours of service include hours for which the employee is paid, or entitled to payment for performing duties for the employer during a taxable year. Vacation, holiday, sick leave, disability, layoff, jury duty, military duty, or leave of absences also count if the employee is paid for the time.
These employee work hours should not be included when determining hours of service:
- Seasonal employees who work 120 or fewer days during the year
- Single employees who work in excess of 2,080 hours per year
There are three methods for calculating the total number of hours of service for a single employee:
- Actual hours worked
- Days-worked equivalence
- Weeks-worked equivalency
FTEs are calculated by adding the total hours of service for all employees for the taxable year (using one of the approved hours of service methods) and dividing by 2,080. Fractions are rounded down, unless the result is less than 1 in which case the employer must round up to one FTE. Because of the way FTEs are calculated, it is possible for an employer to employ more than 25 employees and remain eligible for the tax credit if some of the employees work less than full time.
Determining Average Annual Wages
To calculate average annual FTE wages, an employer figures total wages paid during a taxable year to all employees, then divides the total wages paid by the number of FTEs. Average annual wages should be rounded to the next lowest multiple of $1,000.
The employer's premium payments are limited by the average premium in the small group market's rating area in which the employee enrolls for SHOP coverage . The credit will be reduced by the excess of the credit calculated using the employer's premium payments over the credit calculated using the average premium.
IRS example: if an employer pays 50 percent of a $7,000 premium for family coverage for an employee ($3,500), but the average premium for family coverage in the small group market in the rating area in which the employee enrolls is only $6,000, for purposes of the calculating the credit the employer's premium payments are limited to 50 percent of the $6,000 ($3,000 not $3,500).
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 practical or possible for the employer to offer insurance to its employees through a SHOP Exchange at the beginning of its first taxable year beginning in 2014. If a small employer offers coverage in a plan year that begins on a date other than the first day of its taxable year that would have qualified the employer for the credit under the rules otherwise in place before 2014, and the employer begins offering coverage through a SHOP Exchange as of the first day of its plan year that begins in 2014, then it will be treated as offering coverage through a SHOP Exchange for its entire 2014 taxable year for purposes of the SBTC.
Claiming the credit - Form 8941
Eligible small employers claim the credit by attaching Form 8941 to their income tax returns. Tax-exempt eligible small employers must file Form 990-T with an attached Form 8941 even if Form 990-T would not otherwise be required.
Where can I find more information?
Comments are due November 25, 2013. More information can be found at here.
The information in this document is based on preliminary review of the national health care reform legislation and is not intended to impart legal advice. The federal government continues to issue guidance on how the provisions of national health reform should be interpreted and applied. The impact of these reforms on individual situations may vary. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. As required by US Treasury Regulations, we also inform you that any tax information contained in this communication is not intended to be used and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code.