Small Business Health Care Tax Credit

As a result of the Affordable Care Act (ACA), qualified small employers may be eligible to receive a tax credit for a portion of the health insurance premiums paid on behalf of their employees. The Internal Revenue Service recently released a reminder regarding the credit.

There are several requirements for small businesses to qualify for the credit. The small business must have fewer than twenty-five (25) full time equivalent employees, pay an average wage of less than $50,000 a year, and pay at least half of the employee health insurance premiums. Additionally, the employers must be enrolled in a qualified health plan offered through a Small Business Health Options Program Marketplace, or meet certain exceptions to the requirement.

The maximum credit is 50% of the premiums paid. Portions of the credit are phased out for employers paying employees over $25,000 and employers with more than 10 full time employees. The credit may not be claimed for more than two consecutive years.

If your business might qualify for the Small Business Health Care Tax Credit, a calculator is available through to estimate your tax credit, see

© 2016 Vandenack Williams LLC
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What Are the Benefits to Offering Group Health Insurance?

An Employee Benefits FAQ with Joshua A. Diveley.

One of the big benefits to offering group health insurance is tax benefits. For example in 2014, there is a small business tax credit that allows small businesses that pay a portion of their employees’ health care premiums to take up to a 50% credit. In addition, the premiums can be paid on a pre-tax basis rather than after tax, which is helpful for employees because if you pay after tax the only tax benefit you can get is by taking an itemized deduction on your personal return and that is subject to a 10% floor so a lot of people don’t hit that because of their income levels so the pre-tax premium payments can be a significant benefit.

Another benefit is that employees may be able to get a preferred group rate as compared to everyone going out and buying individual policies and having their personal demographics determine their rate.

And lastly, with health care costs going up significantly each year, the health care insurance and benefits you provide can be a significant recruitment and retention tool for your employees.

© 2014 Parsonage Vandenack Williams LLC

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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.


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.


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.


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

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Tax Credit for Small Employers Providing Health Insurance

The small business health care tax credit applies to employers covering at least half the premium cost of a qualified health plan for each enrolled employee.  Eligible employers are those with fewer than 25 full time equivalent employees earning average wages of less than $50,000 per year.  In determining eligibility, business owners and their family members aren’t included in the number of total employees and their earnings are not included in the average wage calculation.

The rules for calculating the credit are somewhat complex. The credit is a sliding scale with smaller businesses getting a larger percentage of expenditures for the credit.  Expenses not eligible for the credit can still be deducted as business expenses.

© 2012 Parsonage Vandenack Williams LLC

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