July 05, 2010
Small Business Tax Credits Provided by Health Care Reform
As a result of the Patient Protection and Affordable Care Act (enacted March 23, 2010), the Small Business Health Care Tax Credit now makes many small business taxpayers eligible for tax incentives in exchange for providing health insurance to employees – thus making health care coverage for more U.S. employees affordable. The term small business taxpayer may include both small taxable and Section 501(c) tax-exempt employers. Eligibility for this credit is based on the following factors:
- Number of full time equivalent employees (FTE). Please note that in total, FTE is not based strictly on the physical number of employees, but rather a calculation (see "three simple steps" below) based on the total annual hours of part-time employees. In order to qualify, the business must have fewer than twenty five FTE. FTE excludes owners, family members, and seasonal workers who are employed less than 120 days per year.
- Average annual wages of employees must be less than $50,000 per FTE in order to receive the full credit. The credit is reduced per employee as the wages and number of FTE increases up to 25 FTE.
- The employer must have a qualifying arrangement, defined by the IRS as an arrangement in which the employer contributes at least 50% of the total premium cost per employee enrolled in health insurance coverage. This is based on single coverage only – when an employee maintains family coverage, this requirement is met once the employer contributes at least 50% of the premium as if said employee had single coverage.
Three simple steps, as outlined by the IRS, which will determine if you qualify for the Small Business Health Care Tax Credit:
- First determine the total number of FTE. FTE includes the total number of full-time employees (those who are not owners or family members, and work at least 40 hours per week) plus the number of full time equivalent part-time employees (total annual part-time employee hours divided by total number of full time hours in a year: 2,080 hours).
Example: M & Co. has 10 full-time employees and 3 part-time employees each working 20 hours per week. FTE would be calculated by 10 +( (3 employees x 20 hours per week x 52 weeks per year)/2080 full time hours to be worked in one year), or 10+2=12. M & Co. has 12 full-time equivalent employees.
- Calculate the average annual wages of employees, excluding owners and family members. Divide the total annual wages paid to employees by the number of employees in step 1. If this amount is less than $50,000 and
- You pay at least 50% of the insurance premiums for your employees (at the single coverage rate) you may be eligible for the Small Business Health Care Tax Credit.
Example: M & Co. pays total annual wages of $500,000 for its 12 FTE, therefore $500,000 divided by 12 = $41,667 average wages per employee. If M & Co. pays 50% of health insurance premiums, it may qualify for the Small Business Health Care Tax Credit.
Implementation of the credit will take place over four years. Phase one of the credit commences in 2010. In this phase, taxable small businesses are entitled to a full credit of 35% of the total contribution to health insurance premiums on behalf of qualifying employees. Tax-exempt organizations are entitled to a 25% credit. The credit may only be claimed on the taxpayer’s income tax return and may not be used to offset payroll taxes. Additional guidance for tax-exempt organizations is expected. Phase two will commence in 2014 when the full credit will be increased to 50% for taxable entities and 35% for tax-exempt organizations. By 2014, state run insurance exchange programs will be created and qualified insurance purchases will be made through such exchanges in order to qualify for this credit. The state run insurance exchanges are outlined in the Health Care Reform Act. Also in 2014, the credit will be limited to two consecutive years.
To better understand if you may be eligible, consult the IRS publication of Examples of Employers who are receiving the Credit.
If you think your company may be eligible, or if you have any questions on the Small Business Health Care Tax Credit, contact your MarcumRachlin Tax Professional indicated below. Additional information on this credit can also be found on the IRS website.