There is significant buzz in the media about the small business health insurance tax credits – a mechanism in the Patient Protection and Affordable Care Act (PPACA) designed to make it easier and more cost effective for small employers to provide health insurance to their employees. Among the first questions a small employer should be asking itself is, “Is it part of our corporate culture and business strategy to continue offering or begin offering health insurance to our employees?” To answer this quesiton, small businesses must analyze the consequences of not providing health insurance to employees. In addition to recruting, rewarding, and retaining valuable human capital, small businesses employing more than 50 full time equivalent employeess must provide affordable minimum essential coverage to full time employees and their dependents or risk penalties assessed by the IRS for not providing adequate coverage.
But what about small employers with less than 50 full time equivalent employees? How does the small business health insurance tax credit affect these employers? There is good news for some, and not so good news for others. Not all small employers will qualify for the small business health insurance tax credit. In order to qualify for a small business health insurance tax credit in 2013, small employers must meet each of the following conditions:
- Employ 25 or fewer full time equivalent employees;
- Pay average annual wages of less than $50,000; and
- Contribute at least 50% to the cost of each employee’s self-only premium.
Currently, the tax credits are valued at up to 35% of a small employer’s premium contributions. In 2014, this credit increases up to 50% of the small employer’s premium contributions. However, to be eligible for this increased amount, small businesses must meet the categories referenced above AND purchase coverage through the new Small Business Health Options Program, also known as the SHOP Exchange. The enhanced credit may be claimed for any two consecutive taxable years beginning in 2014 or later. For additional information about qualifying, the IRS has created a step by step guide.
These tax credits can result in significant tax savings for small businesses, particularly in an economical environment where any available cost savings are critical to a small employer’s bottom line. Many small businesses have asked about qualifying for this tax credit, and unfortunately for most, the qualifications are simply too rigid. As a result, at least for those small businesses not subject to employer penalties for failing to provide adequate insurance, the corporate strategy conversation surrounding benefits may become less paternalistic and more focused on cost.
For more information on the small business health insurance tax credit, visit this website maintained by the U.S. Small Business Administration.
