Know how the Affordable Care Act will influence your small business.

Understanding The ACA's Tax Penalties & Tax Credits

Posted December 18, 2015 by Robert W. Ditmer in Keeping Compliant
Are you an applicable large employer or small employer? Your classification will make all the difference when tax season comes around.

With the Affordable Care Act, size matters. A small employer (SE) must file different reports than those required by an applicable large employer (ALE).

Another primary difference between differently sized employers: only ALEs may be subject to certain tax penalties, and only SEs with a certain number of employees may apply for tax credits under the ACA.

We've covered the ACA's impact on small businesses before. 

Employer Shared Responsibility (ESR) Payments

An ESR payment is actually a penalty. The IRS may impose it if the ALE fails to offer minimum essential coverage that is affordable and that provides minimum value to their full-time employees and their dependents.

  • Minimum essential coverage (MEC) is coverage that has been offered under an employer-sponsored plan.

  • Coverage is affordable if the lowest cost self-only health plan is 9.5% or less of the full-time employee's household income. Since an employer is unlikely to know an employee's entire household income, there are safe harbors described in the final regulations that an employer can used based on information that is available to the employer.
  • Minimum value coverage must cover at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan. The U.S. Department of Health and Human Services has developed a minimum value calculator that employers can use.

An ALE will be subject to an ESR payment if either of the following conditions apply:

  • MEC has not been offered to at least 70% (95% in 2016) of its full-time employees, and at least one employee has obtained coverage through the Health Insurance Marketplace and received a premium tax credit; or
  • MEC has been offered to at least 70% (95% in 2016) of its full-time employees, and at least one employee receives a premium tax credit because the coverage was not affordable, did not provide minimum value coverage, or was not offered to that employee.

The calculation of the penalty amount is described in Change #5 of the first article.

Small Business Health Care Tax Credit

Some small employers may be able to apply for a tax credit if they meet certain requirements. To claim the credit a business must meet the following criteria:

  • Have fewer than 25 full-time equivalent employees (FTEE).
  • Pay an average wage of less than $50,000 per year.
  • Pay at least 50% of employee health insurance premiums.
  • Purchase coverage through the Small Business Health Options Program (SHOP) marketplace.

The maximum credit is a percentage of the premiums that the employer paid during the tax year. The credit is available for only two consecutive tax years.

To claim the credit a business must complete Form 8941. The Instructions for Form 8941 include worksheets for calculating both the number of FTEEs and the average wages of employees. The amount of the credit will be on Line 16 of Form 8941, and this amount should be reported on Schedule K for partnerships and S corporations. Regular corporations and sole proprietorships report the amount of the credit on Form 3800, General Business Credit, Line 4h.

The tax credit is a refundable credit for tax-exempt small employers. But it is limited to 35% and by the total of payroll taxes that have been withheld from employees' payroll.

To help small businesses estimate the tax credit the IRS Taxpayer Advocate Service has provided an online estimator.

Impact of the ACA on Employers

Based on the discussion of the Affordable Care Act in these three articles, certain facts should now be apparent:

  • Every business with employees is affected by the ACA.
  • Size matters. Applicable large employers, who make up only 5% of all employers in 2015, carry a much heavier record-keeping burden than small employers do.
  • Compliance is a serious issue here. ALEs that fail provide adequate coverage can end up paying hefty penalties.

There is, however, a bright spot. Justworks is always here to help. The platform will take on 100% of your compliance risk, so you can focus on running your business instead of worrying about tax penalties.

Get the guide on how the ACA may affect your business.

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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.