A California small employer with 25 or fewer employees may claim the federal small business health care tax credit only if:

Why A is correct

To qualify for the federal small business health care tax credit, a California employer with 25 or fewer full-time-equivalent employees must purchase coverage through Covered California for Small Business (CCSB), the state's small business exchange. The employer must pay a substantial share of the premiums and the plan must be a QHP offered through the exchange. This CCSB requirement is a California-specific procedure examined under AH-III.B.3, which pairs small group guaranteed issue with the tax credit rules and QSEHRA/ICHRA alternatives.

Why the other options are wrong

• B) Self-funded plans do not qualify for the exchange-based small employer tax credit, which requires a QHP purchased through CCSB.
• C) The credit assumes the employer contributes meaningfully to premiums; employees paying everything disqualifies the employer.
• D) The credit is available only for coverage purchased through CCSB, not directly from any insurer.

Memory hook

To get the small business tax credit in California, buy through CCSB.

Why A is correct

The federal small business health care tax credit rewards small employers that contribute to their employees' health coverage. In California, the credit is available only when coverage is purchased through Covered California for Small Business (CCSB), the state's Small Business Health Options Program exchange. CCSB serves employers with 50 or fewer employees, and the tax credit itself is limited to eligible employers with 25 or fewer full-time equivalent employees and modest average wages. This requirement, that the credit runs through CCSB, is a CA-specific rule and a frequent exam point.

Why the other options are wrong

• B) Self-funded association plans are generally not the vehicle for the state exchange credit, and California restricts self-funded association arrangements.
• C) Medicare Advantage employer plans are retiree or group Medicare products, not the small business exchange products that trigger the federal credit.
• D) The credit requires purchase through the California exchange; a direct out-of-state contract does not qualify for the credit.

Memory hook

Small employers collect the credit only inside the CCSB storefront; buying outside means no credit.

Why A is correct

California law ties the federal small employer tax credit to the state's SHOP exchange: an eligible employer with 25 or fewer full-time equivalent employees may claim the credit for contributions toward employee premiums only when coverage is purchased through Covered California for Small Business (CCSB). The credit is also conditioned on the employer paying a uniform percentage of premiums and on average annual wages staying below the statutory threshold. Purchasing outside CCSB, self-funding, or offering only limited-benefit lines does not satisfy the purchasing requirement, so the tax credit is unavailable in those cases.

Why the other options are wrong

• B) Self-insured employers assume their own claims risk and do not purchase coverage through CCSB. Because the credit requires coverage bought through the SHOP exchange, a self-funded plan cannot qualify.
• C) A stand-alone dental plan is not comprehensive medical coverage and does not meet the credit's requirement that the employer purchase qualified health plan coverage through CCSB.
• D) Buying from an out-of-state insurer does not satisfy the requirement that coverage be obtained through the California small business exchange; placement outside CCSB forfeits the credit.

Memory hook

Small employer credit = buy through CCSB or no credit. The exchange is the toll booth.

Why A is correct

The federal small employer health care tax credit — up to 50% of the employer's premium contribution (35% for eligible tax-exempt employers) — is available to employers with 25 or fewer full-time equivalent employees and average wages below the statutory threshold, but only when the employer purchases coverage through the Covered California for Small Business (CCSB) marketplace. Buying through CCSB is a condition of the credit in California. The credit phases out as firm size and wages rise. Employers should document both the CCSB purchase and employee eligibility because the credit is claimed on the employer's federal tax return, not through the employee's individual policy. Agents selling through CCSB must be certified to guide employers through the purchase correctly.

Why the other options are wrong

• B) Self-funded plans do not qualify for the premium-based small employer tax credit; the credit is tied to purchasing insured coverage through CCSB.
• C) The credit applies to comprehensive medical coverage, not to standalone dental policies.
• D) The credit is limited to small employers with 25 or fewer FTEs; employers over 100 employees are in the large group market.

Memory hook

25 or fewer employees plus buying through CCSB = the small employer credit door opens. Self-insure, and the credit walks away.

Why A is correct

California's small business exchange, Covered California for Small Business (CCSB), serves employers with 50 or fewer employees. To claim the federal small employer health insurance tax credit, which applies to employers with 25 or fewer employees, the employer must purchase a qualified health plan through CCSB; buying coverage elsewhere does not make the employer eligible. This is a specific California exchange rule tested in the small-group and PPACA objectives.

Why the other options are wrong

• B) Coverage must be purchased through the CCSB exchange from a participating, licensed carrier; unlicensed out-of-state coverage does not qualify.
• C) The tax credit is tied to purchasing an insured QHP through the exchange, not to self-funding a plan.
• D) A stand-alone HSA is not health coverage and does not qualify for the small employer premium tax credit.

Memory hook

To get the small-business tax credit in California, you must buy through CCSB — the credit is attached to the exchange.