Small Business Tax Credits

Though most small businesses are not required to provide health insurance to their employees, those who do may be eligible for tax credits under the ACA.



How Does the ACA Affect Small Business?

Several provisions of the Affordable Care Act (ACA) will likely have significant effects on small businesses, their employees, and families. Small businesses will have the option to purchase insurance through a new market, called the Small Business Health Options Program (or SHOP Exchange). In Utah, this exchange is called Avenue H. Though small business who do not meet the requirements for the Employer Mandate are not required to offer insurance to their employees, many small businesses still do. In 2014, individuals will be required to carry health insurance, so they may look to their employers to provide it. If a small business does not offer insurance, skilled employees may be compelled to search for employment with larger companies that do. Fortunately, the ACA provides assistance in the form of tax credits to small businesses that still wish to offer health insurance to their workforce.

How Does the Small Business Health Credit Work?

Small businesses with fewer than 25 Full Time Equivalents (FTEs) may be eligible for tax credits to assist in the cost of health insurance. To qualify for the tax credit, the average wage of the FTEs must be below $50,000 and the employer must pay at least half of the cost of the employees' health insurance. There are two phases to the tax credit:

  • Phase 1 (2010-2013): Eligible employers receive a tax credit of up to 35% of the employer’s contribution toward insurance premiums, calculated on a sliding scale basis tied to average wages and number of employees (see phase-out calculation below).
  • Phase 2: (2014 and onward) Eligible employers that purchase insurance through the SHOP exchange may receive a tax credit of up to 50% of the employer’s contribution toward insurance premiums. These employers may take the tax credit for up to two years. The exact amount each small business receives in tax credits will depend on the number of employees and average wages.

A Full Time Equivalent (FTE) is any full-time employee working 40 hours per week or more, plus part-time hours calculated accordingly. To calculate part-time FTEs, add all the hours worked by part time workers in a year and divide that number by 2080. Certain business owners are not included in the FTE calculations. Note that this calculation is different than calculating FTEs to determine if a company is applicably large under the Employer Responsibility provision of the ACA.

The IRS has provided a worksheet that can help employers determine if they are eligible to receive tax credits. Small businesses can also lean on ISIhr to help determine eligibility.

Here's an Example of How This Works

Say The Bluth Company pays $72,000 in health care premiums and has less than 10 employees with an average wage of $28,000 (tax year 2013)...

  • Determine the maximum credit amount ($72,000 x 35% = $25,200)
  • To calculate the credit phase-out, determine average annual wages over $25,000, or excess ($28,000 - $25,000 = $3,000)
  • Divide the excess by the $25,000 base to calculate the phase-out percentage ($3,000/$25,000 = 12%)
  • Then multiply the phase-out percentage by the maximum credit ($25,200 x 12% = $3,024). This is the phase-out portion of the credit.
  • The health care credit The Bluth Company receives is the maximum credit less the phase-out amount ($25,200 - $3,024 = $22,176)

The IRS has provided additional examples of employers receiving the health care tax credit. And again, ISIhr is happy to help make this determination for your business.

Remember that the employer mandate is not just a math problem, it is a talent problem. This is why ISIhr is in a great position to assist you in both assessing an employer's ability to attract and retain talented employees, and the role offering benefits plays in that strategy. Lean on ISIhr for education and guidance to comply with the ACA. We are happy to schedule a meeting with you to help predict health costs, determine what your responsibilities will be in 2015 under the PPACA, and come up with a strategy for compliance.

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