Are there tax credits for offering health insurance to employees?

by | Jun 27, 2025 | Business Taxes, Credits & Incentives

Here’s what HIVE AI had to say about “Are there tax credits for offering health insurance to employees?”:

Yes, there are several tax credits available for employers who offer health insurance to their employees. The primary credit is the Small Business Health Care Tax Credit, along with various other considerations and requirements under the Affordable Care Act.

Small Business Health Care Tax Credit (Section 45R)

The Small Business Health Care Tax Credit is the most significant tax credit available to employers for providing health insurance coverage to their employees. This small business health care tax credit helps small employers, including small tax-exempt employers, to afford the cost of covering health insurance premiums for their employees. It specifically targets employers with low and moderate-income workers. IRS.gov Tax Topics

Credit Amounts and Eligibility

The maximum credit is up to 50% of contributions paid by small business employers for premiums, and up to 35% for small tax-exempt employers. IRS.gov Tax Topics However, the credit rates have evolved over time. For taxable years beginning after December 31, 2013, the maximum credit rate is increased to 50 percent from 35 percent for eligible small employers (and to 35 percent from 25 percent for tax-exempt eligible small employers).

To qualify for this credit, employers must meet specific requirements:

Employers that pay at least half the cost of qualified “single” (employee-only) health insurance coverage for their employees, have fewer than 25 full-time-equivalent employees. For example, two half-time workers count as one full-time equivalent employee, and pay wages averaging less than $50,000 per full-time-equivalent employee per year. IRS – Publication 4862: Small Business Health Care Tax Credit

Enhanced Requirements for Post-2013 Tax Years

For taxable years beginning after December 31, 2013, the credit is available only with respect to premiums paid by a small employer for a QHP offered by the employer to its employees through a SHOP Exchange, and is available only for a period of two-consecutive-taxable years. This means that employers must purchase qualified health plans through the Small Business Health Options Program (SHOP) Marketplace to be eligible for the enhanced credit rates.

To qualify for the credit, a small employer must pay premiums on behalf of each employee enrolled in a qualified health plan offered by the employer through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement. IRS.gov Tax Topics

Special Exceptions and Relief Provisions

There are important exceptions for employers in certain geographic areas where SHOP coverage may not be available. For calendar year 2024, SHOP Marketplaces in certain counties across the United States didn’t have qualified health plans available for employers to offer to employees. However, relief is available, which allows eligible small employers with a principal business address in those counties to claim the credit for 2024 if they properly claimed the credit under section 45R for all or part of 2023. IRS – Instruction 8941: Instructions for Form 8941, Credit for Small Employer Health Insurance Premiums

Credit Calculation and Phase-Out

The credit amount is subject to phase-out provisions based on the number of employees and average wages. Subject to subsection (c), the amount determined under this subsection with respect to any eligible small employer is equal to 50 percent (35 percent in the case of a tax-exempt eligible small employer) of the lesser of— (1) the aggregate amount of nonelective contributions the employer made on behalf of its employees during the taxable year under the arrangement described in subsection (d)(4) for premiums for qualified health plans offered by the employer to its employees through an Exchange, or (2) IRC § 45R(b) [the calculation continues with additional limitations].

Under § 45R(c) the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of the dollar amount in effect under § 45R(d)(3)(B).

Tax Treatment and Deduction Limitations

It’s important to understand that claiming the credit affects the deductibility of the premium payments. No deduction shall be allowed for that portion of the premiums for qualified health plans (as defined in section 1301(a) of the Patient Protection and Affordable Care Act), or for health insurance coverage in the case of taxable years beginning in 2010, 2011, 2012, or 2013, paid by an employer which is equal to the amount of the credit determined under section 45R(a) with respect to the premiums. IRC § 280C(h)

However, since the health insurance premium payments are more than the total credit, eligible small businesses may still claim a business expense deduction for the difference. IRS – Publication 4862: Small Business Health Care Tax Credit

Filing Requirements

If you’re a small employer that qualifies for this credit, use Form 8941, Credit for Small Employer Health Insurance Premiums and attach it to your income tax return. IRS.gov Tax Topics An eligible small employer may claim the credit by filing an income tax return and attaching Form 8941, “Credit for Small Employer Health Insurance Premiums” (or in the case of tax-exempt eligible small employers, filing Form 990–T, “Exempt Organization Business Income Tax Return,” and attaching Form 8941).

Additional Considerations for Tax-Exempt Organizations

For small tax-exempt organizations, the credit is refundable. IRS – Publication 4862: Small Business Health Care Tax Credit This means that even if the organization has no tax liability, it can still receive the benefit of the credit as a refund.

Carryover Provisions

Small businesses who do not have a tax liability during the year can carry the credit back or forward to other tax years. IRS – Publication 4862: Small Business Health Care Tax Credit This flexibility ensures that businesses can benefit from the credit even in years when they have limited tax liability.

State Credits and Subsidies

Beyond federal credits, many states offer additional incentives. Some States offer tax credits to certain small employers that provide health insurance to their employees. Some of these are refundable credits and others are nonrefundable credits. In addition, some States offer premium subsidy programs for certain small employers under which the State makes a payment equal to a portion of the employees’ health insurance premiums under the employer-provided health insurance plan.

The interaction between state and federal credits is generally favorable to employers. The maximum amount of the section 45R credit is not reduced by reason of a State tax credit (whether refundable or nonrefundable) or by reason of payments by a State directly to an employer.

Large Employer Considerations

While large employers (those with 50 or more full-time equivalent employees) don’t qualify for the Small Business Health Care Tax Credit, they face different requirements under the Affordable Care Act’s employer shared responsibility provisions. You may have to make a shared responsibility payment if at least one full-time employee receives the premium tax credit for purchasing individual coverage through the Health Insurance Marketplace and you: – failed to offer coverage to at least 95 percent of full time employees and their dependents, or – offered coverage to at least 95 percent of full-time employees but not to the particular full-time employee receiving the credit (one of the 5 percent), or – offered coverage that was not affordable, or – offered coverage that did not provide a minimum level of coverage. IRS – Publication 5208: Affordable Care Act: Determining if you are an applicable large employer

Professional Employer Organizations (PEOs)

For businesses that use Professional Employer Organizations, the credit treatment has specific rules. A credit is specified in this paragraph (e) if such credit is allowed under— (v) Section 45R (employee health insurance expenses for small employers); Tresuary Reg. Treasury Regulation 31.3511-1 The regulations specify how these credits are allocated between the PEO and the client company.

The Small Business Health Care Tax Credit represents a significant opportunity for qualifying small employers to reduce the cost of providing health insurance to their employees. However, the eligibility requirements are specific and have evolved over time, particularly with the requirement to purchase coverage through SHOP Marketplaces for the enhanced credit rates. Employers should carefully review their eligibility and consider working with tax professionals to ensure they maximize their available benefits while complying with all applicable requirements.

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