8841 / What employers are eligible for the new tax credit for health insurance under the Affordable Care Act?
(1) have 25 or fewer eligible full time equivalent (FTE) employees, and(2) pay wages averaging under $50,000 (this amount is indexed for inflation) per employee per year.2
IRC Section 45R provides a tax credit beginning in 2010 for a business with 25 or fewer eligible FTEs. Eligible employees do not include seasonal workers who work for an employer 120 days a year or fewer, owners, and owners’ family members, where average compensation for the eligible employees is less than $50,000 and where the business pays 50 percent or more of employee-only (single person) health insurance costs. As a result, the compensation of owners and family members is not counted in determining average compensation, and the health insurance cost for these people is not eligible for the health insurance tax credit.3
The credit is largest if there are 10 or fewer employees and average wages do not exceed $25,000. The amount of the credit phases out for businesses with more than 10 eligible employees or average compensation of more than $25,000 and under $50,000. The amount of an employer’s premium payments that counts for purposes of the credit is capped by the average premium for the small group market in the employer’s geographic location, as determined by the Department of Health and Human Services.4
Example: In 2025, a qualified employer has nine FTEs (excluding owners, owners’ family members, and seasonal employees) with average annual wages of $24,000 per FTE. The employer pays $75,000 in health care premiums for these employees, which does not exceed the average premium for the small group market in the employer’s state, and otherwise meets the requirements for the credit. The credit for 2025 equals $37,500 (50 percent x $75,000).5