Small Business Health Care Tax Credit for Small Employers

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Beginning 2010, eligible small employers may claim a tax credit if the employer makes non-elective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of participating employees.  For tax years 2010 through 2013, the maximum credit is 35% for small business employers and 25% for small tax-exempt employers. An enhanced version of the credit will be effective beginning January 1, 2014.  In general, on January 1, 2014, the rate will increase to 50% and 35% respectively, allowing the cost of providing insurance to be even lower for employers.

Can you claim the credit?

To be eligible, you must cover at least 50% of the cost of single (not family) health care coverage for each of your employees.  You must also have fewer than 25 full-time equivalent employees.  Those employees must have average wages of less than $50,000 a year.  Also, the amount of the credit you receive works on a sliding scale.  The smaller the business or charity, the greater the credit allowed.

Full-time equivalent employees are defined as follows: for example, if you have 50 employees that work 20 hours per a week each, this is the equivalent of 25 full-time employees.

Credit in tax years after 2013

In 2014, major provisions of the Affordable Care Act (ACA) take effect, including the establishment of Health Insurance Exchanges and, in many states, the expansion of Medicaid.  Many of these new provisions will affect small business’ approach to offering healthcare coverage to employees.

Beginning 2014 and beyond, the 50% credit for employers is the lessor of:

  1. The total amount of non-elective contributions that the employer makes on behalf of its employees during the tax year under a contribution arrangement for premiums for qualified health plans
  2. The total amount of non-elective contributions that would have been made during the tax year if each employee had taken into account (1) or had enrolled in a qualified health plan that had a premium equal to the average premium tax for the small group market in the rating area in which the employee enrolls for coverage.
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