A combination bit and bit holder assembly includes a bit holder having a forward body portion and a shank. The forward body portion includes an upper end and a lower end. An insert is mounted in the bore of the upper end of the body portion. The insert also includes a central bore that receivingly retains a receiving cup. The receiving cup includes a bottom portion and an annular flange that extends from the bottom portion and defines a hollow forward portion. A bit is mounted in the hollow forward portion of the receiving cup which is configured to have a ductility that provides impact absorption to the bit.