Changes to the Small Employer Health Insurance Credit

July 2014

Under the Patient Protection and Affordable Care Act, some changes to the Small Employer Health Insurance Credit are scheduled for tax years beginning in 2014. Previously, a taxable eligible small employer was allowed a credit of 35 percent of nonelective contributions for health insurance for its employees; tax-exempt eligible small employers were allowed a 25 percent credit. The credit will remain available for 2014 and later years, but taxpayers should be aware of key changes that could affect eligibility. 

Consistent with prior years, a taxpayer must meet the following criteria to be eligible:

  • The employer must have less than 25 nonseasonal, full-time equivalent employees (FTEs). The credit begins to phase out at 10 employees and is completely eliminated at 25.
  • For tax years beginning before 2013, average annual wages of the FTEs must be less than $50,000; the phaseout for the credit begins at $25,000. These wage limits are indexed to the Consumer Price Index for Urban Consumers for years beginning in 2014.
  • Employer contributions must cover 50 percent of the premium for a qualified self-only option health plan for each enrolled employee. This requirement may be satisfied by contributing a uniform percentage of at least 50 percent of selected coverage for each employee. For example, if an employee enrolls in a family plan with a high premium, the employer only is required to contribute 50 percent of the cost of a self-only plan. 

So what’s new for taxable years beginning in 2014? 

  • The credit increases to 50 percent for taxable employers and 35 percent for tax-exempt employers.
  • Employers must offer insurance through an exchange or the Small Business Health Options Program (SHOP). SHOP is available to small businesses with 50 or fewer FTEs. An employer still may qualify for the full credit in 2014, even if coverage was not obtained through the SHOP as of the first day of the tax year. This exception applies if the employer begins offering coverage through the SHOP marketplace in 2014 when its old plan expires. In addition, coverage the employer offered before switching to SHOP must have qualified for the credit before 2014.    
  • The credit only is available for two consecutive taxable years, beginning with the first taxable year in which the employer files an income tax return with an attached Form 8941, Credit for Small Employer Health Insurance Premiums. This maximum two-year coverage period does not take into account any taxable years beginning before 2014.

Finally, employers should know that the cost of premiums used to claim the credit cannot exceed the average premium cost for a small group market in a rating area. If a business chooses to offer a health plan more expensive than the average cost of the rating area, the credit will be based on the average instead of the true cost.

Taxpayers currently taking advantage of the credit should be aware of these changes to use the increase in credit percentage. Other eligible small employers should consider the potential value this credit will bring for a two-year period.

For more information on how this could affect your organization, contact your BKD advisor.

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