Small Employers’ Health Insurance Tax Credit

Do You Qualify for the Small Employers? Health Insurance Tax Credit!!
By Fred Fischer, Benefits Director, CFP, Inc.

Health Reform ACT – Small Business Tax Credit


When the PPACA – Health Reform Act passed in March of 2010, there was a provision included for a Small Business Tax Credit on employer paid health insurance premiums. The law was made retroactive to include premiums paid from January 1, 2010 forward. For taxable years beginning January 1, 2010, through December 31, 2013, small employer’s may receive a tax credit of up to 35 percent of the employer’s contribution toward their employee’s health insurance premium if the employer contributed at least 50 percent of the total premium cost or 50 percent of a benchmark premium. If the small business is a nonprofit, the tax credit equals 25 percent instead of 35 percent.


What is a Small Employer? A small employer is defined for purposes of the tax credit as an employer with fewer than 25 full-time equivalent (FTE) employees with an average annual wage amount of less than $50,000. FTE employees include leased employees, but do not include seasonal workers (unless the seasonal workers work more than 120 days per year).


To calculate FTE’s, you add up total payroll hours paid for the year (excluding any individual employee hours in excess of 2080 annual hours), and then divide the total by 2080 to get full time equivalents (FTE’s). Sole proprietors, a partner in a partnership, a shareholder owning more than 2 percent of an S corporation and any owner of more than 5 percent of other businesses Owners and their family members are excluded from this calculation. To calculate the average annual wages, you take total wages paid divided by your FTE’s to come up with an annual average wages. Again, wages paid to owners and their family members are excluded.


The full 35% credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000. The credit phases out as firm size and average wage increases, resulting in a partial credit for employers exceeding 10 full time equivalent employees and average annual wages exceeding $25,000.


Can I Still Apply for the Credit?  The credit is applied for on IRS form #8941 and is part of your annual income tax return for your business. In the event that the credit was not addressed on your 2010 business tax return, it should not be too late. If you think you might qualify for the credit, we recommend you check with your tax professional for advice on how to proceed.

  • Businesses who have already filed their annual income tax return should still be eligible to claim the credit: For small businesses that have already filed and later determine they are eligible for the credit, you should be eligible to file an amended 2010 tax return.


  • Businesses without tax liability this year can still benefit: The Small Business Jobs Act of 2010 provided that for Tax Year 2010, eligible small businesses may carry back unused general business credits (including the small employer health care tax credit) five years.Previously these credits could only be carried back one year. Small businesses that did not have tax liability to offset in 2010 should still evaluate eligibility for the small business health care tax credit in light of this expanded carry back opportunity.


  • Businesses that couldn’t use the credit in 2010 can claim it in future years: Some businesses that already locked into health insurance plan structures and contributions for 2010 may not have had the opportunity to make any needed adjustments to qualify for the credit for 2010. So these businesses may be eligible to claim the credit on 2011 returns or in years beyond. Small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.


Summary: This credit can be substantial for those employers that qualify. If you think you might qualify for the credit, we recommend you check with your tax professional for advice on how to proceed. If the law stays in place it is scheduled to increase to 50% in 2014. We do have several resource articles, frequently asked questions, and calculation worksheets regarding the new law. We will make these available to any of you by email/fax/mail. Just contact our office and we will provide these in the most efficient manner. If you have additional questions about the Health Care Credit or any other benefits related questions, feel free to call us here at CFP (866-532-0417) or by email at We are the endorsed benefits agent of the AOL and appreciate any opportunity to help you with your benefits planning.

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