Health Care Act- Some Credits Available Immediately

June 17, 2010 | Subscribe to our RSS Feed

Small businesses considering paying at least 50% of your employees health insurance costs- you may entitled to a nice tax break.

For tax years beginning in 2010 through 2013, eligible small employers that purchase health insurance coverage for their employees may be eligible for a tax credit to help offset the cost of the insurance coverage. This is one of the few provisions in the Health Care Act that is effective in 2010.

First, do you Qualify for the Credit?

Only eligible small employers qualify for the credit. Your business must meet all of these criteria:

1. It employs no more than 25 Full-time Equivalent (FTE) employees during its tax year. FTE employees are determined by dividing the total hours worked by all employees during the year by 2,080 (rounded down to the nearest whole number). However, the maximum hours counted for any one employee is 2,080. Also, the hours worked by seasonal workers aren’t counted unless they work for the employer on more than 120 days during the tax year.
2. It pays annual FTE wages that average no more than $50,000. This is determined by dividing the total wages the employer pays by the number of its FTE employees and then rounding that number down to the nearest $1,000. For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).  Wages paid to seasonal workers are excluded if the worker’s hours are excluded in determining the number of FTE employees for item 1.
3. The employer has a qualified health insurance plan (or arrangement) that requires it to pay at least 50% of the premiums (on a uniform basis) on behalf of all of its employees who enroll in the plan.

Calculating the Amount of the Credit

Step One—Calculate the Maximum Credit Amount. For tax years beginning in 2010 through 2013, an eligible small employer’s maximum credit equals 35% (25% for tax-exempt employers) of the lesser of the following amounts [ IRC Sec. 45R(g)(2) ]:

1. The amount of contributions the employer made during the tax year to its qualified health arrangement to purchase qualifying health insurance coverage for its employees. Qualifying health insurance coverage is basically health insurance purchased from an insurance company licensed under state law. Only nonelective employer contributions qualify. Basically, this means that employee elective contributions to the plan that are used by the employer to pay for the employee’s coverage don’t qualify for the credit. Premiums paid in 2010 before the Health Care Act was enacted can qualify for the credit. (See IRS FAQ-8.)
2. The amount of contributions that the employer would have made during the tax year to its qualified health arrangement if each employee had enrolled in coverage with a small business benchmark premium. The small business benchmark premium will be determined by the Secretary of Health and Human Services (HHS) each year on a state-by-state basis. The 2010 table can be found in Rev. Rul. 2010-13 and has been reproduced in Appendix 2 of this release.

Step Two—Calculate the Available Credit. The maximum credit is available only to an employer with 10 or fewer FTE employees and whose employees have an average annual FTE wages of less than $25,000. If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the credit available to the employer equals the maximum credit amount calculated in step one reduced by the sum of the following two amounts, as applicable (but not below zero):

Here’s an example: A business has 15 FTEs and $30,000 average annual wages.  Assume that for 2010 F&E pays $96,000 in nonelective health care premiums for its employees, which does not exceed 80% (the percentage of premiums paid by F&E) of the small business benchmark premium for F&E’s state and otherwise meets the requirements for the credit.

F&E’s credit is $15,680, calculated as follows:

Maximum credit: (35% x $96,000)                                                          $33,600

Reduction for FTEs in excess of 10: ($33,600, 5/15)                       ($11,200)

Reduction for average annual wages in excess of $25,000

($33,600 x $5,000/$25,000)                                                         ($6,720)

Available credit:                                                                                                $15,680

To help make your life a little easier, this health care credit table estimates the applicable reduced credit percentage available to employers with varying levels of FTEs and average annual wages. This table can be used to quickly estimate the credit available to a small employer.

Questions?

sam.cohen@glassjacobson.com

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