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Small Business Employee Benefits and HR Blog

Final Regulations on the Small Business Health Care Tax Credits

On June 30, 2014, the Internal Revenue Service (IRS) issued final regulations on the small business health care tax credits available under the Affordable Care Act (ACA). The tax credits are intended to make it more affordable for small businesses to buy health insurance for their employees. Final regulations on small business health care tax credit

The final regulations establish eligibility requirements for the small business health care tax credit. The credit has been available since the 2010 tax year, but was implemented through IRS notices rather than formal rulemaking. The final regulation does not differ dramatically from its proposed version released last August.

Eligibility for the Small Business Health Care Tax Credit

According to the final regulations, small employers are eligible for the tax credit if they satisfy all three of these items:

  • Employer has no more than 25 full-time equivalent (FTE) employees who are paid, on average, annual wages of no more than $50,800 each.

  • Employer contributes at least 50% of the premium cost on behalf of each enrolled employee. 

  • Employer purchases a group health insurance plan through their state's SHOP Marketplace (or qualifies for an exception to this requirement, such as no SHOP plans are available in the region).

The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for tax-exempt employers.

See: Small Business Health Care Tax Credit FAQs - 2014

Once a small employer claims the tax credit, they will only be able to continue to do so for two years. A commenter told the IRS that the two-year limit might cause some employers to discontinue contributing to employee premium coverage once the credit expires. The IRS responded that the cap is imposed by the statute. 

Small Employers Must Purchase Plan through the SHOP Exchange

The requirement for small employers to purchase a health plan through the SHOP Marketplace is new for 2014. This requirement may come as a surprise for small employers who have not been required to use the SHOP Marketplace to purchase coverage in prior years.

Read the regulations via the Federal Register here.