New Draft Form Released for Calculating Small Employer Health Insurance Credit

IR 2010-96 [http://www.irs.gov/newsroom/article/0,,id=227404,00.html]

IRS has released a draft version of Form 8941 (Credit for Small Employer Health Insurance Premiums) that small businesses and tax-exempt organizations will use to calculate the Code Sec. 45R credit when they file income tax returns next year. IRS also explained how eligible tax-exempt organizations, which do not generally file income tax returns, will claim the credit during the 2011 filing season.

Background. Under the Patient Protection and Affordable Care Act (Affordable Care Act, P.L. 111-148), effective for tax years beginning after Dec. 31, 2009, an eligible small employer (ESE) may claim a tax credit for nonelective contributions to purchase health insurance for its employees. (Code Sec. 45R) An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. (Code Sec. 45R(d)) However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. (Code Sec. 45R(c)) Aggregation rules apply in determining the employer. (Code Sec. 45R(b))

The contributions must be provided under a qualifying arrangement, i.e., one requiring the ESE to make a nonelective contribution for each employee who enrolls in certain defined qualifying health insurance offered by the ESE equal to a uniform percentage (not less than 50%) of the premium cost of the qualifying health plan. (Code Sec. 45R(d)(4))

The credit is a general business credit, can be carried back for one year and carried forward for 20 years, and can offset alternative minimum tax. (Code Sec. 38(b), Code Sec. 39(a)), Code Sec. 38(c)(4)(B)(vi))

Calculation of credit amount. For tax years beginning before 2014, the credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage:

1. Total nonelective contributions the ESE made on behalf of the employees during the tax year for the qualifying health coverage.

2. Total nonelective contributions the ESE would have paid if each employee were enrolled in a plan that had a premium equal to the average premium for the small group market in the State (or in an area in the State) in which the employer is offering health insurance coverage. Health and Human Services (HHS) determines whether separate average premiums apply for areas within a State and also determines the average premium for a State or sub-State area. (Code Sec. 45R(b))

Observation: In Rev Rul 2010-13, 2010-21 IRB, IRS released a state-by-state table of average health insurance premiums for the small group market for the 2010 tax year; see article in Federal Taxes Weekly Alert 05/06/2010.

The applicable percentage is 35% for tax years beginning after 2009 and before 2014 (25% for tax exempts) and is 50% for tax years beginning after 2013 (35% for tax-exempts). For exempts, the credit is a refundable tax credit limited to the amount of the employer's payroll taxes (income tax and Medicare tax withheld from employees' wages and the employer share of Medicare tax on employees' wages) during the calendar year in which the tax year begins.

For more details on the small business health care credit, see Weekly Alert 05/20/2010.

How to compute and claim the small business health care credit. Both small businesses and tax exempts will use new Form 8941 to compute the Code Sec. 45R credit. The new one-page, 25-line form has been released in draft form, but its instructions have yet to be released.

Eligible small businesses will attach Form 9841 to their returns. Tax-exempt organizations will compute the small business health care tax credit on Form 9841 but will claim the credit on a revised Form 990-T (Exempt Organization Business Income Tax Return), which is used by tax-exempts to report and pay the tax on unrelated business income. IRS says Form 990-T will be revised for the 2011 filing season to enable eligible tax-exempt organizations, even those that owe no tax on unrelated business income, also to claim the small business health care tax credit.

IRS says the final version of Form 8941 and its instructions will be available later this year.

Draft version of Form 8941 (Credit for Small Employer Health Insurance Premiums) can be viewed on the IRS website at http://www.irs.gov/pub/irs-dft/f8941--dft.pdf.

Research References: For small employer health insurance credit, see FTC 2d/FIN ¶ L-15681; United States Tax Reporter ¶ 45R4; TaxDesk ¶ 871,010.