Are You Eligible for Health Insurance Tax Credits?

November 18, 2014

The Affordable Care Act (ACA) can save your small business money through its tax credits.

TaxPlan 1114 image 1If your small business has employees, you’ve undoubtedly been paying attention to the news coming out of Washington, D.C., about the Affordable Care Act (ACA). This law was designed to be implemented in waves, rather than all at once, and there have been major changes since it was passed and signed.

Some elements of the ACA have already been incorporated into the health care industry. One of these benefits is a tax credit for the health insurance costs you pay for your employees. For the years 2010-2013, small businesses could take a tax credit of 35 percent of the premiums paid for health insurance.  Small tax-exempt businesses got a credit of 25 percent.

Starting in 2014, small business owners can take a tax credit up to 50 percent of the premiums they paid for health insurance. Tax-exempt small business owners’ credit will be 35 percent. This credit can be claimed for two consecutive tax years.

To be eligible for this credit, you will have to meet the following requirements:

  • You must pay at least 50 percent of the cost of employee-only health care coverage for each of your employees. 
  • You must also have fewer than 25 full-time equivalent employees.  This means the average number of hours worked by your employees is greater than or equal to 40 hours a week.
  • The average wage of the employees covered must be less than $50,000 per year.  This amount will be adjusted for inflation every year.
  • You will have had to pay premiums on behalf of your employees who are enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace.  However, if you qualify for an exception to the requirement to buy health insurance through a SHOP Marketplace, you can still take this credit.

TaxPlan 1114 image 2This credit is refundable.  This means that if you are a small business employer and did not owe tax during the year, you can get a refund on your return, which can be carried back or forward to other tax years. In addition, if you are an eligible small business, you can claim a business expense deduction for the premiums that are in excess of the credit.

In other words, not only do you get to take a credit for these costs, but you can also take a deduction for employee premium payments. 

However, keep in mind that you are eligible to receive the credit and have it be refundable as long as it does not exceed your income tax withholding and Medicare tax liability. Further, if you are a small tax-exempt employer, any refund payments you receive are subject to sequestration.

If you’ve been working with us on tax planning for next year’s filing, you probably know all of this. If not, we encourage you to make an appointment to talk with us about your ACA-related issues – or any other tax questions you may have.

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