Small Employer Health Credit

With the President’s signing of the Patient Protection and Affordable Care Act on March 23, 2010, all qualified small employers – both nonprofits and for-profits – can claim a full or partial tax credit when they pay for at least half of the health insurance premiums for their employees.  Nonprofit employers qualify for the full 25 percent credit if they

1. pay at least half the costs of employee’s single coverage health care plans,
2. employ fewer than 10 full-time-equivalent employees,
3. pay less than $25,000 in average wages per employee.

Employers may also qualify for part of the credit if they

1. pay at least half the costs of employee’s single coverage health care plans,
2. employ fewer than 25 full-time-equivalent employees,
3. pay less than $50,000 in average wages per employee.

NEW: GAO Investigation into Credit

The National Council of Nonprofits is currently working with the Government Accountability Office (GAO) to assess the effectiveness of this Small Employer Health Credit. The GAO has been tasked with reviewing the credit that nonprofit and for-profit employers may claim to help pay for employee health insurance. The most common concerns mentioned at a congressional hearing last year, and confirmed by several State Associations, are the very low salary thresholds and the complicated calculation needed to claim the credit. Nonprofits are encouraged to share with GAO their experiences in claiming the Small Employer Health Care Credit.

• GAO Investigation Summary

Hearing on Small Business Health Credit

The House Ways & Means Committee’s Oversight Subcommittee held a hearing on November 15 on the Small Business Health Insurance Tax Credit. The hearing reviewed the effectiveness of the IRS in administering the tax credit and the extent to which small nonprofit and for-profit businesses have been able to benefit from the credit thus far. The Oversight Subcommittee heard presentations from two panels of government and small business experts, including testimony from a small Montana nonprofit on the importance of the credit to small businesses. Members of the subcommittee and the two panels voiced concerns about the tax credit’s complexity, the unexpectedly low number of businesses claiming it and the potential for tax fraud.

How to File for the Credit

Small businesses and tax-exempt organizations will use the Form 8941 to calculate the small business health care tax credit when they file income tax returns next year.  Eligible tax-exempt organizations that do not generally file income tax returns are still able to receive the credit in the form of a refund through any of the following types of withholdings (as long as the credit does not exceed the withholdings):

1.      Employee or employer’s share of Medicare withholdings

2.      Federal income tax withholdings employer withholds for employee

Tax-exempt organizations will claim the small business health care tax credit on a revised Form 990-T. The Form 990-T is currently used by tax-exempt organizations to report and pay the tax on unrelated business income. Form 990-T has been revised for the 2011 filing season to enable eligible tax-exempt organizations -- even those that owe no tax on unrelated business income -- also to claim the small business health care tax credit.

How the Credit Works

The small employer credit will help all small employers (defined as 25 or fewer employees and average wages below $50,000 per year) provide insurance to their employees.

• In Phase I (2010-2013), small nonprofit employers can take a credit (in the form of 25percent of the employer contribution for employee insurance premiums) and apply that credit to taxes withheld through payroll (and employees would still get full credit for taxes withheld from their pay).
• In Phase II (2014-onward), the amount of the credit increases to 35percent.

The law treats for-profits and nonprofits differently in these respects: for-profits get a higher rate for the credit during both phases (35 percent in Phase I and 50 percent in Phase II), but nonprofits can claim the credit each pay period whereas for-profits must wait until year-end to claim an income tax credit, and then, only if they are profitable.

Nonprofits can claim the full 25 percent of the health credit if they pay at least half of the employee premium and employ fewer than 10 workers that are each paid average wages of less than $25,000. The employer can apply the full credit to the aggregate amount of actual premiums paid or a lesser average premium amount, as determined by the U.S. Department of Health and Human Services (HHS).

Frequently Asked Questions

• What employees do I count? To determine the number of full-time equivalent employees, divide the total straight-time hours of paid work at your organization by 2080 (40 hours for 52 weeks). Overtime hours worked are not included in the calculation. Presumably salaried workers should be counted as working 2080 hours, but this will be clarified in the future by the Secretaries of the Treasury and Labor. The hours of leased employees are included, but you don’t count relatives and dependents of fiduciaries, nor seasonal workers working fewer than 120 days (such as camp counselors).

• What wages count? Total wages paid, divided by the number of full time equivalents. The amount is rounded down to the nearest lowest multiple of $1,000.

• How do I claim the credit? The small employer credit can be claimed against three of the payroll taxes that nonprofits regularly send into the IRS: the employer and employee share (combined total of 2.9%) of Medicare withholding, and the federal income taxes withheld by the employer on behalf of the employee. Employees will continue to get credit for their withheld income taxes payments. 

• How long can I claim the credit? The credit is available immediately through 2013, and then for two additional years as long as insurance is purchased through a newly created exchange.

The Internal Revenue Service has also provided guidance, tax tips, guides, examples, and answers to frequently asked questions on its website and alerted small employers of the credit via a special postcard that was sent out in April.

Additional Resources

• New Form 8941 and the instructions to Form 8941
• Revised Form 990-T
• IRS Guidance on the Credit
• IRS Tax Tips
• IRS Three-step Eligibility Guide
• IRS Examples of Qualifying Employers
• IRS Frequently Asked Questions
• Small Employer Tax Credit Calculator
• Montana Nonprofit Testifies in Defense of Small Employer Health Credit
• Hearing on Small Business Health Insurance Tax Credit
•  “Nonprofits: We Must Start Beating the Drum”
• “Nonprofit Groups Upset at Exclusion from Health Bills” New York Times 9/13/2009