Small Employers, the SHOP Exchange, and the Affordable Care Act

Special state SHOP exchanges and tax credits are available to small employers who provide health insurance coverage to their employees.

If you are an employer with 50 or fewer full-time equivalent employees (generally, those working 30 or more hours per week on average), the Affordable Care Act imposes no requirements on you. You are exempt from the employer health care mandate that applies to employers with 50 or more employees.

However, the Affordable Care Act does provide small employers who elect to provide coverage for their employees with some great opportunities—the ability to obtain lower cost coverage through special state SHOP exchanges and tax credits to help pay for employees’ coverage.

SHOP Exchanges

Historically, small employers have had to pay much more for health insurance than large employers because they did not have a large pool of employees to be covered who could share the costs of health care. The Affordable Care Act attempts to end this disparity through its SHOP program. “SHOP” is short for Small Business Health Options Program. Under the Affordable Care Act, each state establishes its own SHOP exchange that brings together hundreds or thousands of small businesses to form a single insurance pool. SHOP is designed to offer small employers many of the advantages of large business insurance pools: purchasing power, lower costs, reduced premiums, and more health insurance plan choices.

Small employers (those with 50 or fewer full-time equivalent employees) are not required to obtain their coverage through their state’s SHOP exchange, or to obtain any coverage at all. However, those that do so can save money and qualify for special tax credits.

SHOP is open to employers with 50 or fewer full-time equivalent (FTE) employees. You must have at least one regular "common law" employee to use SHOP--not counting yourself or your spouse. Basically, anyone to whom you provide a W-2 form is a common law employee. You can use the online Full-time Equivalent (FTE) Employee Calculator to determine how many FTE employees you have.

If you're a sole proprietor or self-employed with no employees, you can get individual coverage through your state health exchange, but not through the SHOP Marketplace.

If you plan to use SHOP, you must offer coverage to all of your full-time employees. Moreover, in many states, at least 70% of your full-time employees must enroll in your SHOP plan. Use the online SHOP Marketplace Minimum Participation Rate Calculator to determine how many of your employees must enroll.

There is a SHOP exchange (also called a marketplace) for each state. Links to all 50 SHOP exchange websites may be found at www.healthcare.gov/small-businesses/employers/.

Tax Credits

Small businesses that elect to provide their employees with coverage through their SHOP exchange may qualify for substantial tax credits. To get the credit, you must:

  • have no more than 25 full-time equivalent employees
  • pay your employees average annual full-time wages of less than $52,000, and
  • pay at least 50% of the annual premiums for your employees’ health insurance.

The amount of the tax credit you receive depends on various factors, including the number of full-time-equivalent employees and the amount you contribute to their insurance premiums. Employers with ten or fewer full-time-equivalent employees paying an annual wage of $25,000 or less qualify for the maximum credit—50% of the amount the employer pays for employee health insurance. For example, if you paid $20,000 for employee health insurance, you’d be entitled to a whopping $10,000 tax refund. The credit will be less for other small businesses. Use the online Small Business Health Care Tax Credit Estimator to determine how large a credit you can qualify for. These tax credits are available for a total of two consecutive years.

To calculate and claim the tax credit, your business must file IRS Form 8941, Credit for Small Employer Health Insurance Premiums, with your annual tax return. For detailed information on filling out this form, see the Instructions for Form 8941. If you are a small business, include the amount as part of the general business credit on your income tax return.

For more information, check out the Healthcare.gov SHOP webpage at www.healthcare.gov/small-businesses/employers/.

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