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Small Business Employee Benefits and HR Blog

Reduction in Small Business Health Care Tax Credit for Some

tax-3The Affordable Care Act (ACA) designed the Small Business Health Options Program (SHOP Marketplace) to provide small employers with more choices for their healthcare plan. One of the aspects of the SHOP Marketplace that makes it appealing for small businesses is the Small Business Health Care Tax Credit available to some small employers. According to a recent IRS notice, the ongoing federal budget sequestration is going to have an impact on the Small Business Health Care Tax Credit program for tax-exempt employers.

Reduction in the Small Business Health Care Tax Credit

The Internal Revenue Service recently announced that the ongoing federal budget sequestration will reduce refunds for tax-exempt employers whose payments are processed October 1, 2014 through September 30, 2015 by 7.3 percent.

According to the IRS notification, the sequestration reduction rate will be applied “unless and until a law is enacted that cancels or otherwise impacts the sequester.” Only then will the sequestration reduction rate be subject to change.

The IRS also noted that the sequestration doesn’t impact Small Business Health Care Tax Credits for non-tax-exempt employers “as the credit is not a refundable credit for non-tax-exempt employers.”

The affected tax-exempt employers will receive notification that a portion of their requested payment was subject to the sequester reduction and the amount.

Read the IRS notice here.

Background on the SHOP Marketplace

As part of the ACA’s Health Insurance Marketplaces, there is an option for small businesses called the SHOP Marketplace. This is a new way for small businesses with fewer than 50 employees (or fewer than 100 in some states) to purchase a traditional group health insurance plan. Small businesses who want to access the small business tax credits must purchase a SHOP plan (unless there are no SHOP plans available in the region).

Background on the Small Business Health Care Tax Credit

The small business health insurance tax credit was created to assist small businesses in providing health insurance coverage to employees. The tax credit is worth up to 50 percent of a small business’ contribution toward employees’ premium costs.

Are Tax-Exempt Employers Still Eligible for the Credit?

Yes. According to the IRS, a tax-exempt organization, described in section 501(c), can be eligible for the credit as long as the organization meets the other criteria needed to be eligible. The credit is refundable so long as it does not exceed the organization’s income tax withholding and Medicare tax liability.