Certain small businesses may not know it, but they could be eligible to receive a federal tax credit in 2010, provided they paid a portion of their employees’ health insurance premiums. One of the sections of the Patient Protection and Affordable Care Act (a.k.a. Healthcare Reform) provides this tax credit to businesses with less than 25 full time employees and with average wages less than $50,000. The credit is quite generous, and can be as high as 35 percent of the health insurance cost incurred by the employer.
In tax law, there are often complicated calculations and regulations, and this is no exception. Nevertheless, here is a brief summary of how the tax credit works and who will be eligible: (Also, my discussion only addresses for profit businesses. Not for profit businesses are also eligible, with slightly different regulations.)
Number of employees – The business must have fewer than 25 full time equivalent employees (FTE). A fulltime equivalent is an employee that works 2,080 hours in a year, or 40 hours per week over 52 weeks. For part time employees, you must calculate their full time equivalent. This is done by taking the number of hours worked by the employee and dividing it by 2,080 hours. So if you have two employees that each worked 1,040 hours, then each would be half of an FTE. Combined they would equal one FTE as they worked 2,080 hours. As you can see, even if you have more than 25 employees, you may qualify if some of those employees are part time in nature. It is the definition of full time equivalents that is relevant.
Average annual wages – The average compensation of each full time equivalent employee must be less than $50,000. This is determined by the total wages paid divided by the number of full time equivalent employees. The business owners’ salary and any relatives are not included in this calculation.
Qualifying costs – Health insurance premiums paid by the employer for the tax year under a qualifying arrangement are used to determine the amount of your credit. IRS Notice 2010-82 provides detailed guidance for meeting the qualifying arrangement requirement. Generally speaking, to receive the credit, the employer must pay a uniform percentage (not less than 50 percent) of the health insurance premium for each employee enrolled in the health insurance plan. Only the portion paid by the employer is a qualifying expense. The portion paid by the employee for health care coverage is not a qualifying expense. Lots of rules and exceptions around this, so please review the IRS regulations.
Phase out – The maximum credit of 35 percent of qualifying costs is available to employers with less 10 FTE’s and paying less than $25,000 in average annual wages. The credit percentage declines as the number of FTE’s and / or average wages increase. It is totally phased out for employers with 25 or more FTE’s or with average annual wages of $50,000 or more.
Type of credit – This will be treated as a general business credit for employers. Consequently, it is not refundable if the business has no tax liability, but will be eligible to be carried forward and used against future years tax liabilities.
You shouls also review IRS Notice 2010-82 to determine your eligibility. If you have any questions regarding the credit, feel free to submit it in the bottom right side of this webpage or shoot me an email at email@example.com.
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