ACA small employer tax credit: Are you eligible?

Ashley Gillihan for HR.BLR.com writes: Small employers and large employers alike are facing changes to their health plans due to the next wave of Affordable Care Act (ACA) regulations going into effect in 2014. But you may not be aware that there is a small employer tax credit available for small employers who choose to offer healthcare benefits to their employees.

What is the small employer tax credit under the ACA?

Small employers are eligible for a health insurance premium tax credit under the ACA. Here are some of the details:

• Small employers are eligible for a tax credit equal to a portion of the employer's cost to provide health insurance. Different sections of the ACA hold differing definitions of "small employer." For the purposes of the tax credit, a small employer is one with less than 25 full-time equivalent employees, and annual average wages from the preceding year of less than $50,000.
• "Whether you're a small employer is determined based on 'controlled group' rules." Ashley Gillihan explained in a recent BLR webinar. The ACA defines what group you are a part of, so some small employers who otherwise meet the definition may still not qualify. Be sure to check the rules to see if you qualify – even if you meet the above requirements.
• Small employers must have contributed at least 50 percent of the cost of the health insurance premiums to qualify for the credit.
• The credit amount is generally 35 percent through 2013. It will be 50 percent thereafter.
• As you get closer to either of those thresholds – number of employees or wages paid – the amount of the credit reduces. The credit amount begins to phase out for employers with more than 10 employees and/or more than $25,000 in average wages.
• The credit is based on the lesser of your actual contributions or the average premiums in the state.
• Until 2014, the credit applies to any accident and health insurance (major medical) coverage provided. Beginning in 2014, the credit will only apply to coverage offered through the exchange.
• The credit is only available for 2 more years beginning in 2014.

If you're a small employer who qualifies, taking the tax credit provided under the ACA could be an incentive for you to offer coverage or at least a way to offset the costs of doing so.
That said, remember that taking the credit means you can't take the tax deduction that is already available. "The issue depends on whether it's better to take the credit versus the deduction that you get under the code for your employer contributions towards accident and health coverage. You've always gotten a deduction for amounts you paid to the carrier. You get the deductions in the year in which you actually pay the carrier. You don't get the deduction if you take the credit. And it depends on your particular circumstances whether the deduction makes more sense than the credit." Gillihan noted.

For more information on the small employer tax credit under the ACA, order the webinar recording of "Small Business and the ACA Explained: Compliance Obligations, Tax Credits, and More." To register for a future webinar, visit http://store.blr.com/events/webinars.
Attorney Ashley Gillihan is counsel in the Atlanta office of Alston & Bird LLP. He focuses his practice exclusively on health and welfare employee benefit compliance and litigation issues for employers, health plan administrators, and other health and welfare benefit plan service providers.