Starting with the 2010 tax year, the Affordable Care Act authorized a tax credit for certain small employers that paid for some or all of their employees’ health insurance. During that time frame, few employers took advantage of the credit, either because they didn’t qualify or because the amount of any potential credit was too low.
Starting in 2014, however, the amount of the potential credit has increased from 35 percent of employee-only premiums paid (by for-profit employers) to 50 percent of the premiums paid. For small tax-exempt employers, the potential credit rose from 25
to 35 percent of premiums paid. As a result, small employers have more incentive to investigate whether they can claim the credit.
That’s the good news. The bad news is that it’s not as simple as paying your employees’ premiums throughout 2014 and deciding whether you can claim the credit when you prepare your taxes next year. Instead, the potential availability of the credit needs to guide your decision-making related to the health benefits you offer to employees for the 2014 plan year. The main reason for this is that, starting in 2014, you can only qualify for the tax credit if you purchase insurance through the federal Small Business Health Options Program Marketplace, or SHOP. Premiums paid for insurance purchased in the private market no longer qualify for the credit.
Employers That Qualify for the Credit
The full 50 percent credit is available only to employers that both have fewer than 11 employees and pay an average annual wage
of no more than $25,000. The potential credit is reduced for employers that have between 11 and 25 employees and/or pay an average annual wage of between $26,000 and $50,000.
In determining whether you meet the basic qualifications for the credit, the most important thing to know is that you don’t have to include owners or their family members in your employee count. Nor do you include their salaries in calculation of the average annual wages paid. The term “family member” is defined very broadly to include a wide variety of extended family members and in-laws. So, if you have more than 25 employees but a number of them are members of an owner’s family, there is still a chance that you meet the basic qualifications for the credit.
In the near term, the biggest drawback to the credit is the requirement that you purchase insurance through the federal SHOP, which has experienced many of the same setbacks and delays as the individual health insurance marketplace.
SHOP won’t be open for online enrollment until November of this year. Businesses can still use SHOP, but must go through an insurance agent or broker.
Note that even if—like most companies—you renewed your plan in December or January, it’s not too late to take advantage of the tax credit in 2014. Employers may switch over to the SHOP at any time. For most, however, it will probably make more sense to revisit the tax credit issue in the months leading up to your next open enrollment period.