The new health reform law gives a tax credit to eligible small
employers that provide health care coverage to their employees,
effective with tax years beginning in 2010. In order to qualify as
a small employer eligible for the tax credit:
- the employer must have fewer than 25 full-time equivalent employees ("FTEs");
- the average annual wages of its employees for the year must be less than $50,000 per FTE, and;
- the employer must pay the premiums under a "qualifying arrangement."
Because the limitation on the number of employees is based on
FTEs, an employer with 25 or more employees could qualify for the
credit if some of its employees work part-time. Average annual
wages are calculated by dividing the total wages paid by the number
of FTEs and rounding the result down to the nearest $1,000.
In order to be a "qualifying arrangement", the employer
must pay premiums for each employee enrolled in health care
coverage offered by the employer in an amount equal to a uniform
percentage (not less than 50%) of the premium cost of the coverage.
The employer can claim a credit for up to 35% (25% for tax exempt
organizations) of the premium costs for 2010 through 2013. In 2014
the maximum credit will increase to 50% (35% for tax exempt
organizations) of the employer's premium costs. The credit
phases out gradually for businesses with average wages between
$25,000 and $50,000 and for businesses employing between 10 and 25
FTEs. The credit for businesses at or above these thresholds is
reduced based on a formula using the number of FTEs and the average
wages paid. The National Federation of Independent Business
provides an easy-to-use tax credit calculator which is available on
its website at: www.NFIB.com/creditcalculator.
The credit is further limited in that only that amount of an
employer's premium payments that is equal to or less than the
average premium for the small group market in the state (or an area
within the state) in which the employer offers coverage will count
for purposes of the credit. The average premium for each small
group market is determined annually by the Department of Health and
Human Services. Revenue Ruling 2010-13 sets forth the average
premium for the small group market in each state for the 2010 tax
year.
An employer claims the credit on the employer's annual income
tax return, with an attached Form 8941 showing the calculation of
the credit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
