Claiming the Small Business Health Care Tax Credit plus Employer Fines, 2010 Tax Credits and Employee Subsidies

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[Update Dec 2010] The IRS has released final guidance for small employers eligible to claim the new small business health care tax credit for the 2010 tax year.  The IRS have also provide a one-page form and instructions  for small employers to use for claiming the credit for the 2010 tax year.

New Form 8941, Credit for Small Employer Health Insurance Premiums, and newly revised Form 990-T are now available on IRS.gov.  The IRS also posted on its website the instructions to Form 8941 and Notice 2010-82 , both of which are designed to help small employers correctly figure and claim the credit.

Included in the Affordable Care Act enacted in March (see details in previous update below), the small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have.

The new guidance addresses small business questions about which firms qualify for the credit by clarifying that a broad range of employers meet the eligibility requirements, including religious institutions that provide coverage through denominational organizations, small employers that cover their workers through insured multiemployer health and welfare plans, and employers that subsidize their employees’ health care costs through a broad range of contribution arrangements.

In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

Eligible small businesses will first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on its income tax return.

Tax-exempt organizations will first use Form 8941 to figure their refundable credit, and then claim the credit on Line 44f of Form 990-T. Though primarily filed by those organizations liable for the tax on unrelated business income, Form 990-T will also be used by any eligible tax-exempt organization to claim the credit, regardless of whether they are subject to this tax.

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[Previous Update] The IRS has released new details on the 2010 Tax Credit that helps small employers and tax-exempt organizations provide health insurance coverage To their Employees.

Included in the health care reform legislation, the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama on March 23, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

“This credit provides a real boost to eligible small businesses by helping them afford health coverage for their employees,” said IRS Commissioner Doug Shulman. “We urge small businesses and tax-exempt employers to look closely at this important tax break – which is already effective – to see if they qualify.”

The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations. Get Free Small Business Health Insurance Quotes

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.

The maximum credit goes to smaller employers – those with 10 or fewer FTEs – paying annual average wages of $25,000 or less.


Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.


Source : IRS


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[Update] After a year of fierce partisan debate, the Democrat-controlled House of Representatives late Sunday night passed the landmark $940 billion health-care reform bill that would extend health insurance coverage to 32 million uninsured Americans, prevent insurance companies from denying coverage to people with preexisting medical conditions and is projected cut the federal deficit by an estimated $138 billion over the next decade. The final tally, which adhered almost entirely to party lines, was 219 “yes” votes and 212 “no” votes. Not one Republican voted for the measure. The health care reform bill has also been signed into law by the President, but a number of other bills (including reconciliation) to modify or amend to the current bill have been submitted. So stay tuned for further updates by subscribing (free) via RSS or Email

Some of the updated provisions that will affect business owners and their employees include:

- Beginning in 2014, employers with 50 or more workers could face federal fines for not providing insurance coverage. Several of the other changes would take effect much sooner.

- Families with annual income above $250,000 (and singles above $200,000) would be required to pay an additional 3.8 percent tax on their investment or unearned income, while contributing more to the Medicare program from their payroll taxes. This “affluent” group and their higher taxes is funding most of the health care reform.

- Starting in 2013, Americans under 65 won’t be able to deduct medical expenses until they exceed 10 percent of income, up from 7.5 percent now; retirees would keep the lower threshold.

- Starting immediately, consumers who hit the medicare-gap would receive a $250 rebate. In 2011, they would receive a 50 percent discount on brand name drugs. The Medicare prescription drug program and its unpopular “doughnut hole” — a big, expensive gap in coverage that affects millions — would be eliminated by 2020.

- Starting in 2018, employers that offer workers pricier plans — or those with total premiums of $10,200 or more for singles and $27,500 for families — would be subject to a 40 percent tax on the excess premium. Retirees and workers in high-risk professions like firefighting would have higher thresholds ($11,850 for singles, or $30,950 for families), pegged to inflation.

- The legislation for the first time would place a $2,500 limit on what can be contributed to employer-sponsored flexible spending accounts, another type of account funded with pre-tax dollars that can be used to pay for medicines, co-payments, and other expenses. Employers currently set their own limits, typically between $3,000 and $5,000 in the absence of a government cap. This change would cost an average worker about $625 in tax savings

- By October 2010 (assuming no legislative changes), many insurance company plans would be prohibited from placing lifetime limits on medical coverage, and they could not cancel the policies of people who fall ill. Children with pre-existing conditions could not be denied coverage.

- By year end dependent children up to age 26 would also be eligible for coverage under their parents’ plans – instead of the current state-by-state rules that often cut off coverage for children at 18 or 19.

- Health insurance will be compulsory for all Americans, and new state-run insurance exchanges would be setup to provide affordable/competing options to private insurers. Americans who do not obtain health insurance would face a federal penalty starting in 2014. The first year, consumers who did not have insurance would owe $95, or 1 percent of income, whichever is greater. But the penalty would subsequently rise, reaching $695, or 2 percent of income. Families who fall below the income-tax filing thresholds would not owe anything. Nor would people who are unemployed or cannot find a policy that costs less than 8 percent of their income.

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[Jan 2010] The WSJ had a very poignant graphic showing how employers and workers could be affected under the recently approved Senate health care bill which requires all citizens and legal residents to purchase a health insurance policy

health care bill impacts reformCompanies would face fines as high as $750 per worker if even one employee seeks federal help to buy a policy. Yet paying the fine could be more cost effective for companies and their low income workers, than subsidizing employee health insurance. Federal subsidies will be available to people purchasing medical coverage through the state-based insurance exchanges, which are expected to be up and running by 2014.


Under the Senate health care bill, most businesses with fewer than 50 workers will be exempt from penalties if they don’t offer employee coverage. Democrats say a package of tax credits within the Senate bill will reduce costs for small businesses. Small businesses that qualify would get a 25% tax credit to help pay for employee coverage. The legislation would also allow small businesses to band together to seek coverage at costs similar to those of much larger companies.

Under the proposed health care plan, a large portion of these workers could end up getting their insurance through the government insurance, simply because it is more cost efficient for the company to pay the fine rather than provide the health care subsidy. So imagine the impact on the already ballooning US deficit if half these workers move under some form of government sponsored insurance.

Other key financial aspects of the Senate Health Care bill:

- It is estimated to cost $848 billion over a 10 year period, but lawmakers say it would be fully offset by new taxes and revenues and would actually reduce the deficit by $130 billion over the same period. Notably, the bill would create a government-run insurance plan (a.k.a the public option) to compete with private insurers, but individual states would be able to choose whether or not to offer it to their residents
- Beginning in 2014, most individuals will be required to maintain minimum essential coverage or pay a penalty of $95 in 2014, $350 in 2015, $750 in 2016 and indexed thereafter; for those under 18, the penalty will be one-half the amount for adults. There are some exceptions to this requirement.

- Federal subsidies will be available to help people afford coverage. The subsidies will be available for people with incomes up to 400 percent of the poverty level, about $88,200 for a family of four. The poverty levels for 2009 is $22,050 a year for a family of four and $10,830 for an individual.

- Millions of people, with income up to 133 percent of poverty, will be newly eligible for Medicaid, the health program for the poor. Currently many states set eligibility requirements well below that level of poverty.


- By requiring everyone to obtain insurance, hospitals will have fewer cases of uncompensated care. Many people without insurance seek care at hospital emergency centers because they do not turn away patients. When patients are unable to pay, hospitals make up those losses by charging more to those with insurance. Democrats say that pushes premiums higher by about $1,100 a year.

- Extend dependant coverage up to age 26. This will probably raise insurance premiums for families.

- A qualified health plan will be offered through the new American Health Benefit Exchange, which must provide essential health benefits that include cost sharing limits. No out-of-pocket requirements can exceed those in Health Savings Accounts, and deductibles in the small group market cannot exceed $2,000 for an individual and $4,000 for a family. Coverage will be offered at four levels with actuarial values defining how much the insurer pays: Platinum – 90%; Gold – 80%; Silver – 70%; and Bronze – 60%.

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