Administration Releases New Information on Small Business Healthcare Tax Credits
Thursday, December 02, 2010
Posted by: Angelin Barrios
Office of Public Affairs
FOR IMMEDIATE RELEASE:
December 2, 2010
CONTACT: Treasury Public Affairs
Administration Releases New
Information on Affordable Care Act’s
Small Business Health Care Tax
Guidance Gives Small Employers Full Set of Tools to Claim Credit for 2010;
Covers Up To 35 Percent of Small Employers’ Health Care Contributions
Today, many small businesses across
America struggle to provide health benefits to their employees. On average,
small businesses pay about 18 percent more than large businesses for the same
health insurance policy. The Affordable Care Act helps level the playing field
by lowering costs for small businesses and increasing their bargaining power.
At the same time, small business owners will have the flexibility to make
choices they believe are right for their business and their employees.
Starting in 2014, firms with up to 100 workers can pool their buying power and
reduce administrative costs by purchasing insurance through a health insurance
exchange. And the Congressional Budget Office predicts that, thanks to
the Affordable Care Act, premiums in the small group insurance market will
decrease 1 to 4 percent by 2016.
To make health insurance more
affordable for small businesses, the new law also includes tax credits for many
small businesses that offer coverage to their workers. Starting in 2010,
small businesses that have fewer than 25 employees, pay average annual wages
below $50,000, and pay for most of their employees’ health coverage may qualify
for a tax credit of up to 35 percent of health expenses. The
Congressional Budget Office estimates that the tax credit will save small
businesses $40 billion by 2019. Both for-profit and nonprofit organizations may
qualify for the tax credit.
The tax credit is already having a
substantial impact. Insurance companies have used the tax credit to encourage
more businesses to provide benefits. Blue Cross and Blue Shield of Kansas City
has promoted the tax credit and enrolled more than 9,000 new members covered by
400 new employers; 38 percent of those new employers did not previously offer
Today, the Obama Administration is
releasing new guidance that will make it easier for small businesses to claim
this tax credit.
Key Facts about the New Guidance:
small business questions about which firms qualify by clarifying that a
broad range of employers meet the eligibility requirements, including:
that pay for a portion of their employees’ health care costs through a
broad range of contribution arrangements.
institutions that provide coverage through denominational
small employers that cover their workers through multiemployer health
and welfare plans; and
the one-page form (Form 8941) and instructions used to claim the credit
for tax year 2010 – both are now available at www.irs.gov.
About the New Guidance
Employers Full Set of Tools to Claim Credit for 2010. The new guidance includes all the tools
small businesses need to claim the credit when they file their 2010 taxes,
including the one-page form (Form 8941) and instructions used to claim the
credit for tax year 2010, as well as the remaining guidance for 2010. All
of this information is now available at www.irs.gov.
Religious Institutions Qualify.
Due to their special status under other law, religious institutions that obtain
coverage through a denominational organization that self-insures the coverage
can qualify for the credit, even though the coverage is not fully insured – a
requirement for most employers. The guidance makes clear that this rule
applies solely for purposes of eligibility for the small business tax credit.
"Qualifying Arrangement” – Wide Range of Employers Qualify. Following up on previous
guidance issued by the Treasury Department that provided transition relief to
help businesses claim the credit for 2010, the new guidance clarifies that a
broad range of common arrangements used by employers to subsidize insurance
coverage for their workers will qualify for the credit for tax years 2010 to
2013. For example, firms that pay more to help older workers cover the
higher premiums and firms that allow employees a choice of coverage, may both
qualify for the credit. For tax year 2010, small employers have the
flexibility to use the transition relief set forth in the earlier guidance or
to take advantage of the rules in the new guidance.
Certain Employers Contributing to Multiemployer Health and Welfare Plans
The guidance provides that a small employer that makes contributions to a
multiemployer plan that are used to pay premiums for employee health insurance coverage
may qualify for the credit, so long as 100 percent of the cost of coverage for
all employees covered by the multiemployer plan is paid from employer
contributions and not by employees.
the Word Out to Small Businesses
ensure that small businesses know about the credit and how to claim it, the
Administration has undertaken a nationwide educational campaign to reach
small employers and their tax preparers.
- Web Features. WhiteHouse.Gov,
HealthCare.Gov , and IRS.Gov all feature special sections on the credit,
including tax tips, detailed frequently asked questions and a worksheet
to help small business owners determine whether they qualify.
- Millions of Postcards to Small Businesses: The
IRS has sent out over 4 million postcards to employers that may qualify
for the credit.
- Over 1,000 Tax Workshops and Small Business
Forums. Every year, tens of thousands of small businesses and
tax professionals around the country attend Small Business Forums and
Tax Workshops to learn about new developments in tax law. This
year, IRS outreach has had a special focus on the small business credit,
featuring it at over 1,000 events.
- Email Blasts to Thousands of Tax Professionals and
Small Businesses. IRS is getting the
word out through its IRS e-News for Tax Professionals and e-News for
Small Businesses. Each newsletter reaches over 175,000 tax
professionals and small business owners.
About the Small Business Health Care Tax Credit
Enacted as part of the Affordable Care Act, the credit was effective
January 1, 2010. As a result, small businesses currently providing
health care for their workers receive immediate help with their premium
The Council of Economic Advisors estimates that 4 million small businesses
are eligible for the credit if they provide health care to their
The credit is worth up to 35 percent of a small business’s premium costs
in 2010 and in each of 2011, 2012, and 2013. In 2014, this rate
increases to 50 percent.
Can Claim Credit for Up to 6 Years. Firms can claim the credit for 2010 through 2013 and
for any two years after that.
Tax-exempt organizations are eligible for a 25 percent tax credit in 2010
and in each of 2011, 2012, and 2013. In 2014, this rate increases to
The credit phases out gradually for firms with average wages between
$25,000 and $50,000 and for firms with the equivalent of between 10 and 25
To avoid an incentive to choose a high-cost plan, an employer’s eligible
contribution is limited to the average cost of health insurance for small
businesses in that state.
Reduction Due to State Credits. The credit is not reduced if an employer also
receives a state health care tax credit or subsidy (except in limited
circumstances to prevent abuse of the credit). In particular,
an employer that receives such a state tax credit or subsidy also receives
the full federal credit based on its entire contribution so long as the
federal credit does not exceed the employer’s net contribution. According
to lists compiled by the National Conference of State Legislatures, about
20 states offer these benefits.
Dental and Vision
Small businesses can receive the credit not only for traditional health
insurance coverage but also for add-on dental, vision, and other limited-scope
Choose the Most Favorable Method of Determining Hours Worked. Because the tax credit’s
matching rate is highest for employers with 10 or fewer full-time equivalent
employees (FTEs), the number of hours worked is an important factor in
calculating the credit. Employers can choose among three different
methods of determining hours to minimize their bookkeeping duties while
receiving the maximum tax credit for which they are eligible. Employers
can look at actual hours of service, or can use simple rules of convenience to
estimate hours based on total days or weeks of service.
The Small Business Health Care Tax Credit: Four
Example 1: Auto Repair Shop with 10 Employees Gets
$24,500 Credit for 2010
Main Street Mechanic:
Wages: $250,000 total, or $25,000 per
2010 Tax Credit: $24,500
2014 Tax Credit: $35,000
Example 2: Restaurant with 40 Part-Time Employees
Gets $28,000 Credit for 2010
Employees: 40 half-time employees (the
equivalent of 20 full-time workers)
Wages: $500,000 total, or $25,000 per
full-time equivalent worker
2010 Tax Credit: $28,000
(35% credit with phase-out)
2014 Tax Credit: $40,000
(50% credit with phase-out)
Example 3: Foster Care Non-Profit with 9 Employees
Gets $18,000 Credit for 2010
First Street Family
Wages: $198,000 total, or $22,000 per
2010 Tax Credit: $18,000
2014 Tax Credit: $25,200
Example 4: Manufacturing Company with 12 Employees
Gets $14,700 Credit for 2010
Acme Air Conditioning,
Wages: $420,000 total, or $35,000 per
2010 Tax Credit: $14,700
(35% credit with phase-out)
2014 Tax Credit: $21,000
(50% credit with phase-out)
 The credit rates are
lower for non-profits to ensure that the value of the credit is approximately
equal to that provided to for-profit firms that cannot claim a tax deduction
for the amount of the credit claimed.