Affordable Care Act: Employer Obligations and Tax Credits

Under the ACA, most small employers do not need to offer their employees health insurance. But, there may be significant tax credits available for employers who choose to do so. This update will provide you with a brief overview of the Small Business Health Care Tax Credit (the “SBHC credit”). This credit may be worth up to 50% of your payment toward employees’ premiums.

 ARE YOU ELIGIBLE?

To be eligible for the SBHC credit, you must:

1. Offer health insurance coverage that meets minimum standards to your employees.

2. Have no more than 25 full-time equivalent employees.

3. Pay average annual wages of no more than $50,000 (indexed for inflation) per full-time equivalent employee; and

4. Pay at least half of your employees’ premiums (at self-only coverage rates.)

Not all employer contributions count as payments toward employees’ premiums. For example, contributions to HSAs do not count as payments toward employees’ premiums. Similarly, premiums paid under a salary reduction arrangement through a cafeteria plan do not count.

 HOW MUCH IS THE CREDIT?

In most cases, the maximum credit is 50% of your contributions to employees’ premiums. The maximum credit is gradually phased out if you have more than ten full-time equivalent employees. It is also gradually phased out if the average annual wage is more than $25,000.

THE IMPORTANCE OF “EXCLUDED EMPLOYEES”

For purposes of determining the SBHC credit, some employees are excluded. This feature is very important for professional employers and certain small businesses. Excluded employees include:

  • Self-employed individuals;
  • 2% or more shareholders of an S corporation;
  • 5% or more owners of certain small businesses;
  • Individuals who are related to the above employees; and
  • Seasonal workers.

Excluded employees do not count toward the number of employees, the average annual wage, or employer premium payments. As a result, companies with highly-compensated employees who also own interests in the company may still be able to take advantage of this credit.

© 2014 Parsonage Vandenack Williams LLC

For more information, contact us

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