You’re small but oh-so mighty. So when you hear about the Affordable Care Act’s health care tax credit, it may look like it has your company’s name on it (because it kind of does). But how do you know if this ACA bonus applies to you? In this article, we’ll explain the ins and outs of the small business health care tax credit, so you can see if your prize is within reach.

What is the small business health care tax credit?

At first, it’s a mouthful. But it’s also a tax relief program that makes it easier for smaller companies to offer health insurance.

If you’re a small business, the credit covers up to half of your contributions toward employee premiums.

If you’re a tax-exempt small business, (a nonprofit that is excused from paying a income taxes), it covers up to 35 percent of your premium payments.

Sounds great. But do I qualify for it?

If you fit snugly into each category below, then you may be entitled to get some cash back. Here’s a little more information about each point:

1. You have 24 or less FTEs

Last year, did your team have less than 25 full-time equivalent (FTE) employees? This number doesn’t just include how many full-timers you have — your part-timers are also folded into the final count. Use this article to find out your exact FTE number.

2. Your team’s average salaries are less than 50k

Sure, your employees earn different amounts depending on their role. But if you cobble all of their wages together and pull out the average, is it less than $50,000? We’ll wait while you grab your calculator. Ready? If you’re nodding, then tick this one off.

health care compliance

3. You help your team with their premium payments

Do you pay a significant portion of your team’s group insurance premiums? First off, major kudos for helping your team with their health insurance needs. If that contribution equals at least half of your employees’ premiums, then you fit the bill.

4. You shop through SHOP

SHOP, which stands for the Small Business Health Options Program, is a marketplace where smaller organizations can purchase group health care plans. There’s a federal SHOP, and then there are state-specific versions. For example, California decided to run its own marketplace, called Covered California, instead of going with the federal one. If you’re a SHOP shopper, then you can check off this requirement pretty easily.

Yay, I’m eligible. How do I claim my credit?

Does each point above describe your situation? If that’s the case, go ahead and talk to your broker, accountant, or other tax or health care advisor to get a confirmation. Not only will they reaffirm your eligibility, they’ll also help you figure out if you can claim it retroactively.

Once you get that squared away, use Form 8941 (instructions here) to determine the actual credit amount, which you’ll get when you file your taxes. You may also be able to claim your premium contributions as a business expense — but your tax advisor will know best.

Are people actually using the small business health care tax credit?

The U.S. Government Accountability Office (GAO) found that even though many companies are eligible for the credit, they aren’t taking advantage of it. In fact, there was $468 million worth of claims filed in 2010, even though the government estimated the number to be closer to $2 billion. Part of the reason for this extreme gap is because some people think the credit needs to be refashioned. Critics say that the requirements are too limiting and don’t apply to enough companies.

Carrie Van Dyck, owner of the Herbfarm Restaurant, told the New York Times that she was surprised she wasn’t eligible for the credit, even though she had less than 25 employees on staff who earned an average salary of $35,000. “It would seem that we are a pretty typical small, mom-and-pop type business that this should apply to.”

Luckily, the IRS is making strides to increase participation rates. In 2014, the tax bonus was changed from 35 percent of a company’s premium contribution to 50 percent. According to the GAO, the credit has been too convoluted for many companies to tackle, which is why there is a need for more education and looser requirements.

Resources to help you out

  • You may be eligible for other state-sponsored incentive programs. Check out this handout from SHOP to see what your state offers.  

You deserve some credit — you can now harness the power of the small business health care tax credit. The path to offering health benefits just got a little sweeter.

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