One item in the 2010 healthcare reform bill that is now effective is a new tax credit for small businesses. This credit will be available to small businesses which provide health insurance for their employees and pay for at least 50 percent of the employee's premium. This is a complicated credit, but in general, to be eligible for the credit a business has to have fewer than 25 full-time equivalent employees with an average full-time equivalent salary of less than $50,000 each. Because this credit may first be claimed on the 2010 tax return, small businesses should consider now whether they will be, or would like to be, able to take advantage of it.
Full-time Equivalent Employees
To calculate the number of full-time equivalent employees (FTEs), divide the total hours for which the employer pays wages to employees (not to exceed 2,080 for any one employee) by 2,080. Then round down to the nearest whole number. (Self-employed individuals and their families are excluded from this group, including partners, sole proprietors, 2-percent shareholders of an S corporation and 5-percent owners of the employer. Seasonal employees are also not included.) To be eligible for the credit, the resulting number of FTEs must be fewer than 25. Employers with between 10 and 25 FTEs are subject to a reduction in the credit. The reduction is 1/15 of the otherwise applicable credit for each FTE in excess of 10.
Average Annual Wages
To determine the average annual wages, divide the total wages paid during the year by the number of FTEs and round the result down to the nearest $1,000. (Exclude wages for the same group of individuals as above.) To be eligible for the credit, the result must be less than $50,000. For average annual wages between $25,000 and $50,000, the credit is subject to a reduction. The reduction is 1/25 of the otherwise applicable credit for each $1,000 of average annual wages in excess of $25,000.
The employer must make non-elective contributions of at least 50 percent of the health insurance premiums for each employee enrolled in qualifying healthcare coverage offered by the employer. Through 2013, coverage purchased from health insurance companies generally should qualify, but of course, that should be confirmed with the health insurance provider.
The 50-percent premium requirement applies only to coverage for the employee. If the employee carries additional individuals (e.g., spouse or dependents), the 50-percent requirement does not apply to that portion of the premium cost. The amount of the eligible premiums is capped at the average premium for the small group market in a state. Finally, the premiums included in the calculation only include those paid by the employer. Therefore, any premiums paid by the employee, including those paid through a salary reduction plan, are not eligible for the credit. However, premiums paid in 2010 prior to the date the healthcare legislation was enacted may be considered if they are otherwise eligible.
The credit is calculated by multiplying the eligible premiums by 35 percent (25 percent for tax-exempt entities) and then reducing it for FTEs in excess of 10 and average wages in excess of $25,000. After 2013, the credit increases to 50 percent of the premiums (35 percent for tax-exempt entities). An example follows:
An employer has 15 FTEs with average annual wages of $32,000. The employer pays eligible premiums of $50,000 during 2010. Its small business health insurance credit would be $6,767.
Credit before reduction
$50,000*.35 = $17,500
Reduction for Excess FTEs
$17,500*5/15 = $5,833
Reduction for Excess Wages
$17,500*7/25 = $4,900
$17,500 - $5,833 - $4,900 = $6,767
Claiming the Credit
The credit is a general business credit and can be claimed beginning on 2010 income tax returns. The deduction for health insurance contributions is reduced by the amount of the credit. Generally the credit can be carried back one year and forward 20 years if not used in the year it is generated. However, for 2010, the credit cannot be carried back. Tax-exempt organizations are allowed to claim the credit against certain payroll taxes.
The IRS has recently issued guidance on the small business health insurance credit and posted frequently asked questions on its website (www.irs.gov). It also has indicated that it will mail postcards to notify small businesses that may qualify for the credit. As with most of the items involved in the recent healthcare legislation, much more will be learned about this credit over time.
Vol. 8, Issue 1