June 14, 2010
Small Employer Health Insurance Tax Credit
Recent Health Care Reform legislation permits a tax credit to certain small employers that provide health insurance coverage to their employees, effective for taxable years beginning in 2010. Both taxable employers and 501(c) tax-exempt employers may be eligible for the credit.
Employers that satisfy the requirements for the credit are referred to as “eligible small employers.” In order to be an eligible small employer:
- the employer must have fewer than 25 full-time equivalent employees (FTEs) for the taxable year;
- the average annual wages of its employees for the year must be less than $50,000 per FTE; and
- the employer must maintain a “qualifying arrangement.”
A qualifying arrangement is an arrangement under which the employer pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 %) of the premium cost of the coverage. (There is transition relief for taxable years beginning in 2010 with respect to the requirements for a qualifying arrangement which are beyond the scope of this summary).
Note, certain employees, such as self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, 5% owners of the employer, and certain individuals related to those individuals, including dependents, are not treated as employees for purposes of the credit. The hours such individuals work, and their wages, are not taken into account in determining FTE employees and wages, and no credit is available for any contribution to purchase health insurance for these individuals.
The maximum credit of 35 % for 2010 (25 % for tax-exempt employers) is available to employers with 10 or fewer full-time equivalent employees (FTEs) paying average annual wages of not more than $25,000. The credit is reduced by 6.667 % for each FTE in excess of 10 employees and by 4 % for each $1,000 that average annual compensation paid to employee exceeds $25,000. Beginning in 2014, the credit will cover 50 % of premiums for qualified for-profit small employers (35 % for qualified tax-exempt employers). The credit is completely phased out as the number of employees (FTE) reach over 25.
Further, premiums eligible for the credit must be paid by an employer under a qualifying arrangement and must be paid for health insurance that meets certain qualifications specified within the Internal Revenue Code.
If your business has 25 or less employees, your company may be eligible for the Small Employer Health Insurance Credit. If you have any questions, please contact your MarcumRachlin Tax advisor.