Smart Benefits: Why Aren’t More Companies Taking Small Business Tax Credit?

Monday, April 11, 2016

 

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Businesses with fewer than 25 full-time employees who make an average of less than $50,000 ($51,800 in 2016) may qualify for the Small Employer Health Care Insurance Tax Credit, established under the ACA, if they cover at least 50 percent of the cost of workers’ individual premium costs and offer coverage through the SHOP marketplace. 

The tax credit is worth up to 50% of an employer’s contribution (up to 35% for tax-exempt employers). It is available to eligible employers for two consecutive taxable years. Even if a business didn’t owe tax during the year, it can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for premiums in excess of the credit.

So why are only a fraction of eligible businesses taking the credit? 

According to a March Government Accountability Office report, only about 181,000 employers in 2014 claimed the credit, a relatively low number compared to the number of employers eligible for the credit, which GAO estimated to be between 1.4 million and 4 million. 

The reasons GAO cited for the limited participation:

  • The maximum amount of the credit doesn’t appear to be a large enough incentive for employers to offer or maintain insurance. 
  • Few small employers qualify for the maximum credit amount. 
  • For those employers who do claim the credit, the credit amount “phases out” to zero as employers employ up to 25 full time equivalent (FTE) employees at higher wages. 
  • The amount of the credit is also limited if premiums paid by an employer are more than the average premiums for the small group market in the employer’s state. 
  • The credit can only be claimed for two consecutive years after 2013. 
  • The cost and complexity involved in claiming the tax credit is significant. 
  • Many small businesses are unaware of the credit. 

 

To learn more about the credit and whether a business is eligible, the IRS offers information here. Businesses must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. Tax-exempt organizations should include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. The Form 990-T must be filed to claim the credit even if an organization doesn’t ordinarily do so.

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Rob Calise is the Managing Director, Employee Benefits. of Cornerstone|Gencorp, where he helps clients control the costs of employee benefits by focusing on consumer driven strategies and on how to best utilize the tax savings tools the government provides. Rob serves as Chairman of the Board of United Benefit Advisors, and is a board member of the Blue Cross & Blue Shield of RI Broker Advisory Board, United HealthCare of New England Broker Advisory Board and Rhode Island Business Healthcare Advisors Council. He is also a member of the National Association of Health Underwriters (NAHU), American Health Insurance Association (AHIA) and the Employers Council on Flexible Compensation (ECFC), as well as various human resource associations. Rob is a graduate of Bryant University with a BS in Finance.
 

 

Related Slideshow: 25 Ways to Support Small Businesses in RI

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