Small Group Tax Credit

Under the new Affordable Care Act, small employers with 25 or fewer employees and an average wage of less than $50,000 per year may be able to use the tax credit to deduct up to 35% of health insurance premium payments from their federal income taxes.

For taxable years beginning before 2014, the amount of the credit is based on a percentage of the lesser of:

1. The amount of nonelective contributions paid by the eligible small employer on behalf of employees under the arrangement during the taxable year, and
2. The amount of nonelective contributions the employer would have paid under the arrangement if each such employee were enrolled in a plan that had a premium equal to the average premium for the small group market in the State (or in an area in the State) in which the employer is offering health insurance coverage. 

The following table lists the average premium for the 2010 taxable year for the small group market in the states primarily served by PRO-TAX Offices.  Family coverage includes any coverage other than employee-only (or single) coverage. 

State                        Employee-only Coverage                   Family Coverage

Alabama                                 $4,411                                     $11,275

Mississippi                              $4,533                                     $10,501

Tennessee                             $4,611                                     $10,369

Virginia                                  $4,890                                     $11,338

West Virginia                         $4,986                                     $11,611 

(For all states, a copy of the IRS state average-cost table is available here.)

Only premiums paid by the employer for health insurance coverage are counted in calculating the credit. If an employer pays only a portion of the premiums for the coverage provided to employees (with employees paying the rest), only the portion paid by the employer is taken into account—including premiums paid before the Affordable Care Act was passed.

Some states have programs to make payments directly to an insurance company to pay a portion of the premium for coverage of an employee under employer-provided health insurance.  The state is treated as making these payments on behalf of the employer for purposes of determining whether the employer has satisfied the “qualifying arrangement” and these premium payments by the state are treated as an employer contribution under the act for purposes of calculating the credit. However, in no event may the amount of the credit exceed the amount of the employer’s net premium payments.

This provision of the Affordable Care Act has been added as section 45R of the Internal Revenue Code.  More specific qualifying details can be found here.  Make sure to visit your local PRO-TAX and let one of our tax professionals help!

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