Under the Affordable Care Act, small employers may be eligible for a special tax credit to help cover the cost of providing health coverage to employees. Employers who are interested in claiming the credit should be aware of a number of important changes for tax years beginning in 2014 and beyond.
General Eligibility Requirements
An employer may be eligible for the credit if:
- It has no more than 25 full-time equivalent employees (FTEs) for the taxable year;
- The average annual wages of its FTEs do not exceed certain amounts; and
- It pays at least 50% of the premium cost for single health care coverage for each employee.
Changes to the Tax Credit in 2014
For tax years beginning in 2014, the following key changes will apply to the small business health care tax credit:
- The maximum credit increases to 50% of premiums paid for small business employers and 35% for small tax-exempt employers;
To be eligible for the credit, small employers must obtain health insurance through the Small Business Health Options Program (SHOP) Marketplace (Note: Until online functionality for the federally-facilitated SHOP is available, small business owners may work with an agent or broker to enroll employees in a qualified health plan and apply for SHOP eligibility);
- For purposes of employer eligibility for the credit, the average annual wages of employees must not exceed $50,800 (the credit phases out gradually for eligible small employers if the number of FTEs exceeds 10 or the average annual wages exceed $25,400); and
- An employer may claim the credit for two-consecutive taxable years, beginning with the first taxable year in or after 2014.
Our section on the Small Business Health Care Tax Credit within the HR & Benefits Library in the Client Resource Center provides additional details. Q&As about the small business health care tax credit are also available from the IRS, along with a Small Business Health Care Tax Credit Estimator, which can help employers determine potential eligibility and get an estimate of the credit they might receive.