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Small Business Employee Benefits and HR Blog

SHOP Tax Credits Reaching Expiration for Early Participants

June 20, 2016

The Affordable Care Act gives small businesses the option to offer a group health SHOP Tax Credits Reaching Expiration for Early Participantsinsurance plan through the Small Business Health Options Program (SHOP) Marketplace. Certain small businesses participating in the Marketplace are eligible to receive a tax credit. This Small Business Health Care Tax Credit, which can be obtained solely through the SHOP Marketplace, is only available for two consecutive taxable years. While the use of the SHOP Marketplace has been attractive to some small businesses, it is possible that coverage procurement through the Marketplace will drop after the expiration of the two-year tax credit.

The SHOP Marketplace

The SHOP Marketplace supports small businesses in providing health and dental coverage to their employees. Depending on the state, small businesses with fewer than 100 or 50 full-time equivalent (FTE) employees are eligible to participate.

SHOP gives small businesses flexibility and the ability to offer their employees health coverage plans from multiple insurers, just as larger companies are able to do. A small business can determine how much money it wants to contribute to premiums and then allow its employees to choose from among the various plans.

Small Business Health Care Tax Credit

Small businesses who participate in the SHOP Marketplace may be eligible for the Small Business Health Care Tax Credit, which can help to lower the cost of insurance premiums. This tax credit is worth up to 50 percent of a small company's premium contributions (up to 35 percent for tax-exempt employers) and is meant to encourage small businesses to offer health insurance for the first time or to maintain their current coverage. It is primarily targeted towards small businesses who hire low- and moderate-income workers.

A small employer is eligible for the Small Business Health Care Tax Credit if all of the following are in place:

  • Fewer than 25 full-time employees
  • An average employee salary of $50,000 or less annually
  • A contribution of at least half of full-time employees’ premium costsEmployees enrolled in coverage through the SHOP Marketplace

These tax credits are only available for two consecutive tax years. For many companies who have used the SHOP Marketplace and taken advantage of these tax credits, their two-year period is coming to an end. The tax credit has been an important incentive for small businesses to use the SHOP Marketplace. However, the U.S. Government Accountability Office found that SHOP Marketplace enrollment has been lower than expected, partially because of the administrative complexity of collecting employee data and calculating the tax credit. It is possible that many businesses will find the administrative burden to be too great now that they will no longer receive the subsidy, leading to a drop in SHOP Marketplace participation.

Conclusion

The SHOP Marketplace was created to provide small businesses with flexibility and greater options when providing healthcare coverage to their employees. The Small Business Health Care Tax Credit has motivated employers to seek small business health insurance coverage in the SHOP Marketplace. But the two-year limitation on the credit may now lead some small businesses to drop SHOP and consider other small business health insurance options.

Have you enrolled in a SHOP plan and received a subsidy? Let us know in the comments section below!

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