Healthcare’s Small Business Tax Credit: Is your Small Business Eligible?

Healthcare’s Small Business Tax Credit: Is your Small Business Eligible?

The Patient Protection and Affordable Care Act includes a tax credit for small businesses that choose to offer healthcare to their employees. The tax credit has been available since 2010 and helps to offset the cost for companies providing the benefit.  Small business owners that provide healthcare should take advantage of the credit, if possible, while those that are considering providing healthcare should evaluate the potential savings the credit can provide.

Currently, a small business is potentially eligible for a credit of up to 35% of the healthcare premiums it paid that year. The potential credit is less for tax-exempt businesses at an allowable maximum of 25%.  The amount of the credit will increase in 2014 to 50% and 35%, respectively, but will also be limited, allowing employers to claim the credit for just two years. The current sequestration has impacted the credit by reducing the refundable portion by 8.7% for certain small tax-exempt employers.

For many small business owners, determining whether or not their company is eligible for the credit has been the biggest hurdle thus far. The following three-step evaluation can help you decide whether the credit is worth pursuing for your business.

First: Does your business cover at least 50% of the costs of health care coverage for each employee, not including coverage for an employee’s family? Or, do you pay a separate premium for each employee based on age and/or other factors? If you do not do either, then you likely do not qualify.  Easy enough so far.

Second: Does your business employ less than 25 full-time equivalent employees? This is where things get complicated. Calculating how many full-time equivalent employees you employ requires an understanding of who is considered an employee and how part-time employees factor into the equation.  Family members, owners, partners, certain shareholders, leased employees, and seasonal workers are not considered employees for this calculation.  Once the employees are identified, their total hours of service must be determined through one of three methods.  The total of service hours is then divided by 2,080 and rounded down to the nearest whole number.  This number must be 24 or lower.  If it is not, you will not qualify for the tax credit.

Third: Are the annual average wages for the 24 or less full-time equivalent employees less than $50,000 a year?  This is calculated by dividing the annual wages paid to all qualifying employee by the number of full-time equivalent employees. The annual average wages must be less than $50,000 a year to qualify.

If you satisfy all of the above three requirements, your small business will qualify for a tax credit of a percentage of the healthcare premiums you paid that year for qualifying employees. That percentage will be reduced based on the number of full-time equivalent employees over 10 employees and the amount annual average wages over $25,000.  For some, this reduction may mean that the credit is reduced entirely.

Keep in mind that this credit is only available to small businesses that elect to offer health care coverage. Starting in 2014, only “large businesses” will be required to offer health care coverage to their employees. Large businesses are those with 50 or more full-time equivalent employees. Originally, small businesses and employers with less than 100 employees were supposed to be able to access a special insurance marketplace to provide coverage for employees starting in 2014.  However, it was recently announced that the implementation of the Small Business Health Options Program or “SHOP” will be delayed until 2015 and there will only be one plan available to small businesses until that time.

Kali Lester, an attorney in our Livonia office, concentrates her practice on municipal law, utility law and appellate law.  She can be reached at (734) 261-2400 or