Small Business Health Insurance and the ACA Tax Credit

As with all things related to health insurance these days, it’s good news/bad news if you’re the owner of a small business with 25 or fewer employees and you want to provide for their group health insurance. First the good news.

Small Business Health Insurance Tax Credit – Good News

According to an article posted in on ModernHealthCare.com June 27, 2014, “The Internal Revenue Service issued a final rule on tax credits intended to make it more affordable for small businesses to buy health insurance for their employees.” The credit has been around since tax year 2010, but it was implemented via notices from the IRS instead of formal rules. That’s changed. As of June 30, the final regulation has been in the Federal Register. It doesn’t really change much, except to make it easier for you or the brother-in-law who does your taxes to find the provisions.

As written, you are eligible for the tax credit if you employ no more than 25 full-time equivalent employees (FTE) with an average annual wage not exceeding $50,800. If you meet those conditions, you must then contribute at least half of the premium cost for each employee enrolled in the plan you offer. In return, you are entitled to a tax credit equal to 50% of the premium amount paid. Note that in many states, at least 70% of your FTEs must enroll in your SHOP plan to qualify for the tax credit.

And, in case you’re wondering how to calculate the number of FTEs you’re employing, the IRS provides this formula:

“Add up the total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee), and divide that amount by 2,080. If the result is not a whole number, round to the next lowest whole number. (If the result is less than one, however, round up to one FTE.) In some circumstances, an employer with 25 or more employees may qualify for the credit if some of its employees work less than full-time. For example, an employer with 48 employees that are each half-time has 24 FTEs and, therefore may qualify for the credit. See the “Who is an employee for purposes of determining FTEs and average annual wages?” and the “What are the permissible ways to count hours of service?” questions on this page for information on how to compute an employee’s hours of service and determining which employees are counted.

Example: For the 2014 taxable year, an employer pays five employees wages for 2,080 hours each, three employees wages for 1,040 hours each, and one employee wages for 2,300 hours. The employer uses a method that counts hours actually worked. The employer’s FTEs would be calculated as follows:

1. 10,400 hours for the five employees paid for 2,080 hours (5 x 2,080)
2. 3,120 hours for the three employees paid for 1,040 hours (3 x 1,040)
3. 2,080 hours for the one employee paid for 2,300 hours (lesser of 2,300 and 2,080)”
4. The total hours counted is 15,600 hours. The employer has seven FTEs (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number)

Small Business Health Insurance Tax Credit – Bad News

Now here’s the bad news: if you’re hoping to get that small business tax credit for this year, the Affordable Care Act says you must purchase the coverage through the Small Business Health Options Program (SHOP), the small business equivalent of HealthCare.gov and state-operated exchanges. This may be news to small employers who haven’t been required to use the SHOP Exchange in the past. It may also represent something of a challenge, since the SHOP Exchange roll-out has been fraught with problems, and in the words attorney Patricia McGrath, “even now is still not up-to-speed.”

Adding to the confusion are delays in “employee choice,” one of the touted benefits of using the SHOP exchanges.” It’s supposed to let employees of small businesses choose between different tiered healthcare plans in much the same way individuals can. The problem is, as of June 11, 2014, employee choice has been delayed until 2016 in 18 states. Those include: Alabama, Alaska, Arizona, Delaware, Illinois, Kansas, Louisiana, Maine, Michigan, Montana, New Hampshire, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, South Dakota and West Virginia. In another 32 states that rely on the federal government to run their SHOP exchanges, the employee choice benefit had already been delayed until tax year 2015. Fourteen of those – including Arkansas, Georgia, Florida and Indiana, will be offering employee choice in 2015.

According to ObamaCareFacts.com, although the opening of “SHOP was delayed until November 15^th 2014…Small businesses can still claim their tax breaks for insuring employees and the maximum break still increases from 35% to 50% starting January 1^st, 2014.” And if your state SHOP isn’t up or running, the website says, “Small businesses will still have the option to purchase SHOP health insurance plans through a broker or agent.” The website also suggests that if you have questions about the SHOP Marketplace for businesses with 50 or fewer employees, you should call 1-800-706-7893, weekdays from 9 to 5 EST. Unfortunately, that bulletin isn’t dated, and given that ObamaCare rules keep changing, checking with a broker or knowledgeable tax preparer may be the wiser move. You can also shop for competitive quotes for small business group health insurance here.