White House Releases Information to Help Small Businesses File for Health Care Tax Credit

The Obama administration has released new information to help small business owners take advantage of tax credits in the Affordable Care Act that reduce the cost of providing health coverage to employees. The update provides business owners with a set of forms, instructions, and documents for claiming a tax credit this year.

Small businesses pay 18 percent more for health insurance premiums than large businesses, according to the White House, but the Affordable Care Act changes that. “Up to four million small businesses could be eligible for relief from high health insurance premiums this year, and, according to the independent Congressional Budget Office, the tax credit will save small businesses $40 billion by 2019,” the White House said.

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

In September, a New York Times article described how the tax credit helped the business of Betsy Burton, the co-owner of The King’s English Bookshop in Salt Lake City, Utah. That month, Burton was among those meeting with President Obama at the White House to mark the six-month anniversary of the enactment of the health care legislation.

The Affordable Care Act also helps small businesses by leveling the playing field with large employers, the White House said, by allowing small businesses to band together to get a fairer deal from insurance companies through the creation of competitive private health insurance markets called Exchanges, which go into effect in 2014.

Exchanges help organize the health insurance marketplace to allow consumers and small businesses to shop for coverage in a way that permits easy comparison of available plan options based on price, benefits and services, and quality. The administration expects that allowing people to pool together will help bring costs down, make the health care system more transparent and competitive, and enable consumers to compare costs and benefits. (More on exchanges, as well as other health care benefits for small businesses, can be found on the Small Business Majority website.)

The new tax credit guidance, located on the IRS.gov website, includes a one-page form and instructions small employers can use to claim the credit for the 2010 tax year: the new Form 8941, “Credit for Small Employer Health Insurance Premiums, “and the newly revised Form 990-T. The IRS has also posted the instructions to Form 8941 and Notice 2010-82, which are both designed to help small employers correctly figure and claim the credit.

The new guidance addresses questions about qualifications and eligibility requirements for employers, which include:

• Religious institutions that provide coverage through denominational organizations;
• Small employers that cover their workers through insured multiemployer health and welfare plans; and
• Employers that subsidize their employees’ health care costs through a broad range of contribution arrangements.

In general, the credit is available to small businesses that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

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 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

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

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