Certain small employers that provide health insurance coverage to employees may be eligible for new tax credits within the Affordable Care Act.  To be eligible an employer must:

  • have fewer than 25 full-time equivalent employees;
  • pay less than $50,000 in average annual wages per full-time equivalent employee; and
  • maintain a qualifying arrangement.  A qualifying arrangement is where the employer pays at least 50% of the premium for each employee enrolled in health insurance coverage.

Only these eligible employers that purchase health insurance in the SHOP exchange can receive a tax credit of 35% of the health insurance premiums paid for the 2010-2013 tax years, and tax exempt eligible employers can receive a credit of 25%.

For 2014 and later, the credit will increase to 50% of premiums paid, and 35% for tax exempt small employers.  The credit will only be available to an employer for two consecutive tax years after 2013.

Only the premiums paid by an employer to a health insurance issuer will be counted to determine the credit; employer contributions to health reimbursement accounts, flexible spending accounts, and health savings accounts are not considered when determining the credit amount.

Additionally, the amount of employer premiums to determine the credit is capped by the premium payment the employer would have made under the same arrangement if the average premium for the small group market in the employer’s geographic location were substituted for the actual premium.  The cap depends on the coverage each employee takes.  If an employer has employees in multiple states, the average state premium where the employee works is used to determine the cap.

Eligible employers will use IRS Form 8941 to calculate the tax credit, but will claim the credit on the business’ annual income tax return.