Client Alerts Small Employer Health Insurance Tax Credits

Publication
12.01.10

The Patient Protection and Affordable Care Act includes an immediate tax break for small employers: the credit for small employer health insurance premiums. Qualified small employers, including nonprofit employers, may reduce the cost of providing health insurance to their employees this year.

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The Patient Protection and Affordable Care Act includes an immediate tax break for small employers: the credit for small employer health insurance premiums. Qualified small employers, including nonprofit employers, may reduce the cost of providing health insurance to their employees this year. The credit is complex and there are important limitations; however, don’t let the complexity of the credit discourage you from exploring its benefits.

Eligibility Rules

  • Providing health care coverage
    A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
  • Employer size
    A qualifying employer must have less than the equivalent of 25 full-time workers (FTE); for example, an employer with fewer than 50 half-time workers may be eligible.
  • Average annual wage
    A qualifying employer must pay average annual wages below $50,000.
  • Both for taxable and tax-exempt employers qualify
    An employer determines its status as an eligible small employer each tax year.
  • Effective for tax years beginning after 2009.

Amount of Credit

  • Maximum Amount
    The credit amount is up to 35 percent of a small business’ premium costs in 2010 (25 percent for tax-exempt employers). The credit is also linked to the average cost of health insurance in its state.
  • Phase-out
    The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 FTEs.

Certain employees are excluded from the determination of FTEs and average annual wages. Excluded employees are sole proprietors, partners in a partnership, shareholders owning more than 2 percent of an S corporation, and any owners of more than 5 percent of other businesses. Family members of these owners and partners are also not taken into account as employees.

Taxable employers can claim the credit as part of the general business credit and must reduce their health insurance deduction by the credit amount.

For tax-exempt organizations, the credit can be claimed on Form 990-T. It is a refundable credit up to the amount of the employer’s income tax withholding and Medicare tax liability.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers. Please contact our office if you have any questions about the new credit for small employer health insurance premiums.

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