Rules finalized for small business health care tax credit

The IRS has published final rules explaining how eligible small employers may claim a partial tax credit for providing health insurance to their employees. To qualify for the credit, the employer must have 25 or fewer full-time equivalent employees (FTE), and the average annual wages of the company’s FTEs must be at or below a specified dollar limit which is adjusted for inflation. In 2014, that limit is $50,800. From 2014 and onward, eligible small employers may claim the credit for up to two more years. Also, the employer must make a standard contribution of at least 50 percent of the cost of employee-only health insurance premiums. In general, the health coverage offered beginning in 2014 must be through a Small Business Health Options Program (SHOP) Exchange, established by the Affordable Care Act (ACA). However, for employers located in areas that don’t have available coverage through a SHOP Exchange, the new rules allow transition relief for 2014.

The new rules explain how to calculate the number of FTEs, the amount of average annual FTE wages, the value of the employer’s contribution to health insurance premiums, and the amount of the credit. Premium surcharges for tobacco users don’t count toward the calculation of the premiums or the tax credit. Wellness incentive payments by the employer don’t count toward the calculation of the premiums, but they do count toward the tax credit (79 Fed Reg 36640, June 30, 2014). These health care reform rules are complicated, so talk with your tax adviser. To claim the credit, use IRS Form 8941; however, be aware that the form may need to be updated in light of the final rules.