.
Summary of Small Business Health Insurance
Tax Credit Under PPACA (P.L. 111-148)
Chris L. Peterson
Specialist in Health Care Financing
Hinda Chaikind
Specialist in Health Care Financing
April 5, 2010
Congressional Research Service
7-5700
www.crs.gov
R41158
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008
.
Summary of Small Business Health Insurance Tax Credit Under PPACA (P.L. 111-148)
his report provides a description of the small business tax credit and illustrations of the
phase-out for qualifying employers’ contributions toward their workers’ health insurance
T premiums, based on §1421 and §10105(e) of the Patient Protection and Affordable Care
Act (PPACA, P.L. 111-148). This credit is available to for-profit and nonprofit employers with
fewer than 25 full-time equivalent employees with average annual wages of less than $50,000.
Type of Credit
Under PPACA, certain small employers will be eligible for a tax credit, provided they contribute
a uniform percentage of at least 50% toward their employees’ health insurance. For nonprofit
(tax-exempt) organizations, the credit will be in the form of a reduction in income and Medicare
tax the employer is required to withhold from employees’ wages and the employer share of
Medicare tax on employees’ wages (with the credit thus limited by these amounts). For all other
qualifying employers, it will be in the form of a general business credit. This type of credit is not
refundable, but is limited by the for-profit employer’s actual tax liability. In other words, if a for-
profit company had a year in which it ended up paying no taxes (i.e., it had no taxable income,
after accounting for all its other deductions and credits), then the small business tax credit could
not be used for that year; there would be no income tax for this credit to reduce. However, as a
general business credit, an unused credit amount can generally be carried forward up to 20 years.
For for-profit employers, “the credit can be reflected in determining estimated tax payments for
the year to which the credit applies in accordance with regular estimated tax rules.”1
Eligible Small Employers
Full Credit
In each of the four years 2010 through 2013, the full (or maximum) credit will cover up to 35% of
a qualified for-profit employer’s contributions2 to health insurance. For example, if an employer
paid for 60% of premiums, the maximum small business tax credit through 2013 will be
equivalent to 35% of the employer contribution (or 21% of the total premium in this example—
i.e., 35% of 60%). In this case, assume the average total premium for this employer was $7,500,
and the employer’s contribution was $4,500 (60%) per FTE, the maximum tax credit would be
$1,575 per FTE (35% of $4,500).3 For nonprofit employers, the maximum credit through 2013 is
25% (rather than 35%) of the employer’s contribution.
1 Internal Revenue Service, “Small Business Health Care Tax Credit: Frequently Asked Questions,” 19, available at
http://www.irs.gov/newsroom/article/0,,id=220839,00.html.
2 For 2010-2013, the “employer contribution” for the year will be calculated as the lesser of (1) the employer’s actual
premium contribution, or (2) the contribution the employer would have made if each of those same employees had
enrolled in a plan with a premium equal to the average premium (determined by the Secretary of Health and Human
Services (HHS)) for the small group market in the state, or area in the state, in which the employer offers health
insurance. Any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not
treated as paid by the employer.
3 An employer could claim a regular business deduction for the amount of the employer contribution not covered by the
credit (i.e., the amount of the contribution minus the dollar amount of the credit).
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Summary of Small Business Health Insurance Tax Credit Under PPACA (P.L. 111-148)
Beginning in 2014, for for-profit employers, the maximum credit is 50% of the employer’s
contribution4 toward premiums, and 35% of employer contributions for nonprofit organizations.
The small business tax credit that is available beginning in 2014 is only available to an employer
for two consecutive tax years. Thus, the small business tax credit is potentially available for a
total of six years—the initial credit availability from 2010 through 2013, plus the two-year credit
period beginning in 2014.
Small employers can claim the full credit amount if they meet the following two criteria:
• The employer has 10 or fewer full-time equivalent employees (FTEs). FTEs are
calculated by dividing the total hours worked by all “employees” (see description
below) during the tax year by 2,080 (with a maximum of 2,080 hours for any one
employee).
• The employer’s average taxable wages are $25,000 or less. This is calculated by
dividing the aggregate amount of wages paid to the “employees” during the year
by the number of FTEs (and then rounding to the nearest $1,000).
For calculating the number of FTEs and their wages, the term “employees” excludes seasonal
workers (working no more than 120 days during the year). In addition, the term “employees”
excludes the following (as defined in the Internal Revenue Code): a self-employed individual, a
2% shareholder in an S-corporation, a 5% owner of an eligible small business, or someone who is
a relation or dependent of these people. Thus, for example, the business will not receive a credit
for small business owners or their family members.
Partial Credit: Phase-Out
The credit is phased out as the number of FTEs increases from 10 to 25 and as average employee
compensation increases from $25,000 to $50,000.5
Table 1 shows the amount of the tax credit as a percentage (maximum of 35%) of the employer
contribution toward workers’ health insurance for for-profit businesses from 2010 through 2013.
This table also applies as the maximum possible credit available to nonprofit organizations
beginning in 2014.
Table 2 shows the amount of the tax credit as a percentage (maximum of 50%) of the employer
contribution toward workers’ health insurance for for-profit businesses beginning in 2014.
Table 3 shows the amount of the tax credit as a percentage (maximum of 25%) of the employer
contribution toward workers’ health insurance for nonprofit organizations from 2010 through
2013.
4 Beginning in 2014, the employer contribution will be calculated as the lesser of (1) the employer premium
contribution toward qualified health plans (QHPs) offered by the employer through an exchange, or (2) the contribution
the employer would have made if each of those same employees had enrolled in a QHP with a premium equal to the
average (determined by the HHS Secretary) for the small group market in the rating area in which the employee enrolls
for coverage.
5 Beginning in 2014, these dollar amounts would be increased by the Consumer Price Index (CPI). However, for
purposes of this report, $25,000 and $50,000 will simply be cited, even for 2014 and beyond.
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Summary of Small Business Health Insurance Tax Credit Under PPACA (P.L. 111-148)
Table 1. Small Business Tax Credit as a Percent (Maximum of 35%) of Employer
Contribution to Premiums, For-Profit Firms in 2010-2013 and Nonprofit Firms in
2014+
Average wage
Firm size
Up
to
$25,000 $30,000 $35,000 $40,000 $45,000
$50,000
Up to 10
35%
28% 21% 14% 7% 0%
11
33%
26% 19% 12% 5% 0%
12
30% 23%
16%
9%
2%
0%
13
28% 21%
14%
7%
0%
0%
14
26% 19%
12%
5%
0%
0%
15
23%
16% 9% 2% 0%
0%
16
21% 14%
7%
0%
0%
0%
17
19% 12%
5%
0%
0%
0%
18
16% 9%
2%
0%
0%
0%
19
14% 7%
0%
0%
0%
0%
20
12% 5%
0%
0%
0%
0%
21
9% 2%
0%
0%
0%
0%
22
7%
0%
0%
0%
0%
0%
23
5%
0%
0%
0%
0%
0%
24
2%
0%
0%
0%
0%
0%
25
0%
0%
0%
0%
0%
0%
Table 2. Small Business Tax Credit as a Percent (Maximum of 50%) of Employer
Contribution to Premiums, For-Profit Firms in 2014+
Average wage
Firm size
Up
to
$25,000 $30,000 $35,000 $40,000 $45,000
$50,000
Up to 10
50%
40% 30% 20% 10% 0%
11
47%
37% 27% 17% 7% 0%
12
43%
33% 23% 13% 3% 0%
13
40%
30% 20% 10% 0%
0%
14
37% 27%
17%
7%
0%
0%
15
33% 23%
13%
3%
0%
0%
16
30% 20%
10%
0%
0%
0%
17
27% 17%
7%
0%
0%
0%
18
23% 13%
3%
0%
0%
0%
19
20% 10%
0%
0%
0%
0%
20
17% 7%
0%
0%
0%
0%
21
13% 3%
0%
0%
0%
0%
22
10%
0%
0%
0%
0%
0%
23
7%
0%
0%
0%
0%
0%
24
3%
0%
0%
0%
0%
0%
25
0%
0%
0%
0%
0%
0%
Source: CRS analysis of PPACA (P.L. 111-148).
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Summary of Small Business Health Insurance Tax Credit Under PPACA (P.L. 111-148)
Table 3. Small Business Tax Credit as a Percent (Maximum of 25%) of Employer
Contribution to Premiums, Nonprofit Firms in 2010-2013
Average wage
Firm size
Up
to
$25,000 $30,000 $35,000 $40,000 $45,000
$50,000
Up to 10
25%
20% 15% 10% 5% 0%
11
23% 18%
13%
8%
3%
0%
12
22% 17%
12%
7%
2%
0%
13
20% 15%
10%
5%
0%
0%
14
18%
13% 8% 3% 0%
0%
15
17%
12% 7% 2% 0%
0%
16
15% 10%
5%
0%
0%
0%
17
13% 8%
3%
0%
0%
0%
18
12% 7%
2%
0%
0%
0%
19
10% 5%
0%
0%
0%
0%
20
8% 3%
0%
0%
0%
0%
21
7% 2%
0%
0%
0%
0%
22
5%
0%
0%
0%
0%
0%
23
3%
0%
0%
0%
0%
0%
24
2%
0%
0%
0%
0%
0%
25
0%
0%
0%
0%
0%
0%
Source: CRS analysis of PPACA (P.L. 111-148).
Author Contact Information
Chris L. Peterson
Hinda Chaikind
Specialist in Health Care Financing
Specialist in Health Care Financing
cpeterson@crs.loc.gov, 7-4681
hchaikind@crs.loc.gov, 7-7569
Congressional Research Service
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