The Patient Protection and Affordable Care Act (Health Care Act) provides a new beneficial tax credit for small employers. For tax years beginning in 2010 through 2013, this legislation provides the small employer health insurance credit for qualified small employers that purchase health insurance for their employees. A qualified small employer is generally one that (a) employs no more than 25 Full-time Equivalent (FTE) employees during its tax year, (b) pays annual FTE wages that average no more than $50,000, and (c) has a qualified health insurance plan (or arrangement) that requires it to pay at least 50% of the premiums (on a uniform basis) on behalf of all of its employees who enroll in the plan.
Self-employed individuals, including partners and sole proprietors, 2% (or greater) shareholders of an S corporation, and 5% (or greater) owners of the employer, are not treated as employees for purposes of this credit.
For 2010, the credit generally equals 35% (25% for tax-exempt employers) of the lesser of (a) the amount of contributions the employer made during the tax year to its qualified health arrangement to purchase qualifying health coverage for its employees or (b) the amount of contributions that the employer would have made during the tax year to its qualified health arrangement if each employee had enrolled in coverage with a small business benchmark premium. The small business benchmark premium will be determined by the Secretary of Health and Human Services each year on a state-by-state basis. Benchmark premium information will then be provided by the IRS.
However, the full amount of the credit is available only to an employer with 10 or fewer FTE employees who have average annual FTE wages of less than $25,000. The credit will phase out when those thresholds are exceeded. Also, only nonelective employer contributions qualify. Basically, this means that employee elective contributions to the plan that are used by the employer to pay for the employee’s coverage don’t qualify for the credit.
For tax years beginning in 2014 and later, eligible small employers who purchase coverage through a state-run Insurance Exchange will be eligible for a tax credit for two additional years of up to 50% (35% for tax-exempt employers) of their contribution. So, a qualified small employer could potentially qualify for the credit for six years—four years under the first phase (2010 through 2013) and two years under the second phase beginning in 2014. Also, the wage limits will be indexed for inflation beginning in 2014.
The credit presumably applies regardless of the type of entity in which an employer conducts business. Thus, a qualified employer can be a C or an S corporation, partnership, limited liability company (LLC), or sole proprietorship.
This is a brief overview of the small employer health insurance credit. Please contact us for an in-depth discussion of this credit and to assess its impact on your business. Keep in mind this is a credit, not a deduction, so it will offset your tax bill on a dollar-for-dollar basis.