Companies that purchase plans through the new health insurance exchanges may be eligible for tax credits. However, some tax-exempt groups may not see as big of a windfall as they expected. (Andrew Harrer/Bloomberg)

Sequestration hit small businesses hard. Once the roughly $85 billion in across-the-board federal spending cuts commenced last year, work became harder to come by for small federal contractors. Companies that provide services to those contractors, as well as those that rely on business from their workers and federal employees, also felt the ripples.

Now, the sequester may hit some small employers’ health costs, too.

Due to rules surrounding the sweeping budget cuts, small tax-exempt employers, such as charitable nonprofits and trade groups, will see a 7.3 percent reduction in the tax credit they can receive next year on coverage purchased through the health care law’s new online insurance marketplaces, according to updated guidance released by the Internal Revenue Service. Officials noted that the reduction will remain “unless and until a law is enacted that cancels or otherwise impacts the sequester.”

Though minor, the revision could render the small-business health insurance exchanges, which are already struggling to gain traction, all the less appealing to a subset of small employers. The tax credits were one of the primary ways the Obama administration said the exchanges would help employers rein in health costs by using the exchanges.

Starting this year, companies that purchase plans through new state-based insurance marketplaces are eligible for tax credits equaling as much as half of their contribution toward employee premiums. Over the previous three years, the credit, which was intended to entice more of the nation’s smallest firms to cover their workers, was worth up to 35 percent of their premium contributions.

Only companies or organizations with fewer than 25 workers are eligible for some portion of the tax credit, and only those with fewer than 10 workers can collect the full 50-percent credit (now slightly smaller for tax-exempt firms). Over the past three years, plans bought outside the exchanges were eligible for the credits, but that changes next year; only those who buy plans through the new marketplaces will now be eligible for the credits.

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