Health Care Tax Credit for Small Businesses

December 13, 2016by Alex Strautman

Health Care Tax Credit for Small Businesses

Employers may be eligible for a Small Business Health Care Tax Credit if the organization has fewer than 25 full-time equivalent employees, the average wages paid to employees are less than $50,000 (adjusted for inflation beginning in 2014), and it pays a uniform percentage of the premium for all employees that is equal to at least 50 percent of the cost of employee-only coverage. The tax credit is available for to eligible employers for two consecutive tax years. Part-time employees count as a fraction of a full-time equivalent employee (for example, two half-time employees equal one full-time equivalent employee for purposes of the credit).

For tax years beginning in 2014 or later, to qualify for the credit, an employer generally must contribute toward premiums on behalf of each employee enrolled in a qualified health plan (QHP) offered by the eligible employer through a Small Business Health Options Program (SHOP) established as part of the Affordable Care Act. (In California, the SHOP Exchange or SHOP Marketplace is known as Covered California for Small Business and it offers coverage to groups with up to 100 employees; in many other states, SHOP coverage is available only to groups with up to 50 employees. Covered California offers coverage from two statewide health plans and three regional health plans in its SHOP.)

Even a tax-exempt enterprise – as described in section 501(c) of the Internal Revenue Code (IRC) and exempt from tax under section 501(a) of the IRC – may qualify for a small business health care tax credit. The credit is refundable for tax-exempt businesses, but it is limited to the amount of the tax-exempt employer’s payroll taxes withheld during the calendar year. For-profit employers can use IRS Form 8921 to get up a tax credit of up to 50 percent of their contributions to employee premiums for health insurance. Non-profit employers can get a tax credit of up to 35 percent of their premium contributions for employee health coverage.

2017 SHOP Marketplace Changes

The SHOP marketplace is introducing a new feature for 2017. Employers can choose a single health plan for all employees or select a plan “category” and give employees the option to select a plan from any insurance company offering plans in that category. In this way, the public exchanges in more than 20 stats will offer a benefit similar to what the CaliforniaChoice private health insurance has offered for two decades and what the Covered California exchange currently offers.

The states expanding coverage to employers for 2017 include Alaska, Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Missouri, Montana, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, Texas, Virginia, Wisconsin, and Wyoming. If you want to know more about the CaliforniaChoice exchange or Covered California for Small Business, contact your employee benefits broker. If you don’t have a broker, we’ll help you find one to speak with about your employees’ health insurance needs.

Shopping for group health insurance?

This guide compiles a list of common questions you may have before you start offering health insurance coverage.