Small Business Health Care Tax Credit: An Employer's Guide

  • Accracy
  • 26th Nov, 2023

This article is written by our friends at Gusto.

Small Business Health Care Tax Credit: An Employer's Guide
Tax Tips

Qualified employers can claim the Small Business Health Care Tax Credit (SBHCTC), potentially reducing their taxes by as much as 50 percent of the premiums they pay for their employees' health insurance.

Tax credits aren't the only way to manage the cost of providing insurance, but they are the most valuable. They provide dollar-for-dollar tax savings, unlike the business expense deduction, which only reduces taxable income.

Here's what small businesses need to know about the SBHCTC.

 

Eligibility for the tax credit

Employers can obtain the credit if their business satisfies four conditions.

1. The employer has fewer than 25 full-time equivalent (FTE) employees

While other provisions of the Affordable Care Act count 30 hours per week as one FTE, the SBHCTC requires 40 hours per week for one FTE.

Because qualification is based on FTEs rather than actual employees, an employer with 25 or more employees can qualify for the credit even if some of their employees work part-time. For example, a business with 48 half-time employees would satisfy this condition.

When calculating FTEs, employers must account for all employees who worked for the business during the tax year, except:

  • Owners of sole proprietorships
  • Partners in partnerships
  • Shareholders of S corporations who own more than 2 percent
  • Owners of more than 5 percent of the business or other businesses
  • Family members of the above

Employers also should exclude premiums paid on behalf of such individuals when determining the amount of their credits.

What about seasonal workers? If they work 120 or fewer days per year, they don't count toward the calculations of the number of FTEs or the average annual wages. Employers can, however, count the premiums paid on behalf of seasonal workers when determining the amount of their credit.

2. The average employee salary is less than $58,000 per year

This threshold is adjusted annually for inflation; for 2022, it is $58,000.

The calculation is straightforward: total annual wages paid divided by the number of FTEs. The calculated figure is then rounded down to the nearest $1,000 (for example, $29,999 is rounded to $29,000).

3. The employer pays at least 50 percent of the full-time employees' premium costs

The payments must be part of a "qualifying arrangement." A qualifying arrangement means an insurance plan where the employer is required to pay a uniform percentage (not less than 50 percent) of the premium cost for each enrolled employee's coverage. Tobacco surcharges don't count for purposes of meeting the uniform percentage requirement.

In addition, different types of insurance plans are considered separately when determining whether the qualifying arrangement requirement is met. So, if an employer offers a major medical plan and a separate vision plan, it generally must satisfy the requirement separately for each.

Some employers offer to contribute more to employees' premiums as an incentive to participate in a wellness program (for example, tobacco cessation or physical fitness programs). The increased contributions for wellness program participants aren't considered when calculating the uniform percentage.

The employer contribution for any employees who don't participate in the wellness program must be at least 50 percent of the premium, including any nonparticipation surcharge. And amounts attributable to participation in a wellness program are considered when calculating the amount of the credit.

In certain circumstances, the following arrangements also are considered qualifying, even if the employer is required to pay a uniform percentage less than 50 percent of the premium cost for some employees:

  • An arrangement that requires the employer to pay a uniform percentage for each enrolled employee (what's known as composite billing) and offers different tiers of coverage (for example, employee-only, dependent, and family coverage)
  • An arrangement that requires the employer to pay a separate premium for each employee based on age or other factors (list billing)

Other exceptions may apply to the uniform percentage requirement. For example, employers whose failure to satisfy it was due solely to additional contributions made to certain employees to comply with state or local law are treated as meeting the requirement.

4. The employer offers all full-time employees coverage through the Small Business Health Options Program Marketplace (SHOP)

SHOP is a program offered by the federal government to help businesses with one to 50 employees provide affordable insurance for those employees.

Employers aren't required to offer SHOP coverage to dependents or to employees working fewer than 30 hours per week, but coverage for full-time employees must be through SHOP.

There are exceptions, though. For example, in 2016, Hawaii received a five-year State Innovation Waiver. As a result, employers in the state couldn't participate in the SHOP Marketplace or claim the credit for insurance premiums paid for health plan years beginning in 2016. The federal government has approved a five-year extension of the waiver through 2026.

In addition, some SHOP Marketplaces in certain counties across the United States didn't have qualified health plans available for employers to offer in 2022. Eligible small employers with a principal business address in those counties may claim the credit for 2022 if they properly claimed the credit for all or part of 2021. Employers can check if they're in such a county by going to https://www.healthcare.gov/small-businesses/ and entering "plans and prices" in the search box.

Note: Multiple employers may count as a single employer, including employers that are:

  • Corporations in a controlled group of corporations
  • Members of an affiliated service group
  • Partnerships, proprietorships, and corporations under common control

For example, a sole proprietor who files a separate Schedule C for two different businesses must treat the two businesses as a single employer for purposes of the credit.

The tax credit calculation

When determining the amount of the credit, an employer can only consider premiums paid under a qualifying arrangement. If the employer paid less than 100% of the premium cost, only the portion paid counts when calculating the credit.

Premiums paid as part of a salary reduction arrangement under a cafeteria plan, which allows employees to choose from a variety of pre-tax employee benefits, are excluded from the calculation. Premiums paid also don't include tobacco surcharges. They do, however, include the costs of an employee's participation in a wellness program and dependent coverage.

The credit amount is based on a sliding scale, with smaller employers enjoying larger credits. Specifically, employers receive smaller credits if they have:

  1. More than 10 FTEs, or
  2. Average annual wages exceeding $28,000 as adjusted for inflation in 2022

If both conditions are true, the credit is reduced separately to account for both.

State premium subsidies and tax credits don't reduce the amount of employer-paid premiums included, whether they're paid directly to the employer or to the insurance company. But the amount of an employer's credit can't exceed its net premium payments (the premiums paid less the amount of any state tax credits or subsidies).

The federal government provides a helpful estimator for calculating SBHCTC amounts.

How to claim the credit

Eligible businesses can only claim the SBHCTC for two consecutive tax years. The credit is claimed as part of the general business credit on Form 3800, "General Business Credit." Employers claiming the credit must reduce their deduction for health insurance costs by the amount of the credit.

Businesses also need to attach Form 8941, "Credit for Small Employer Health Insurance Premiums" to their returns to claim the credit. A taxpayer filing as a single employer for multiple businesses should file a single Form 8941.

The SBHCTC can be claimed against both regular income and alternative minimum tax. If the credit amount exceeds an employer's tax liability, the business can carry the credit back or forward to other tax years.

To carry back the credit and claim a refund, employers must file their amended returns within three years from the filing date of the original tax return or two years from when the tax was paid, whichever is later. If the amount paid in premiums exceeds the credit amount allowed for that year, the employer can also claim a business expense deduction to cover the excess premiums.

Further reading:

 
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