Health Care Reform Advisory #1
2010 Tax Credit Available for Small Employers Subsidizing Employees’ Health Insurance

Among the extensive changes made by the recently enacted health care reform laws is a tax credit for certain employers that is available starting in 2010.  Under the Patient Protection and Affordable Care Act [*], small employers who pay a portion of their employees' health insurance premiums are eligible for a tax credit starting in 2010.

In an IRS News Release, the IRS clarified that the tax credit is available, generally, to small employers that pay at least 50% of the cost of single coverage for their employees. 

The maximum tax credit is 35% of the premiums paid in 2010 (including premiums paid prior to enactment of the PPAC) by eligible small business employers, but the tax credit is limited to 25% of the premiums paid by eligible employers that are tax-exempt organizations. 

The tax credit is available to employers based on their number of full-time equivalent employees (FTEs), and the average wages paid to their employees per year.  FTEs are determined based on a 2,080-hour year, and wages are those wages subject to income tax withholding.  For purposes of determining FTEs and average wages, seasonal workers are disregarded, unless the employee works more than 120 days during the year.   In addition, self-employed individuals, 2% owners of an employer that is an S corporation, 5% owners of the employer, and family members of these individuals are not considered employees for this purpose.  All employers who are part of the same controlled group (determined under the same controlled group rules as are applied to qualified retirement and 401(k) plans) are considered one employer for this purpose.

The maximum tax credit is available for the smallest employers paying the smallest wages, and that tax credit is phased out as the FTE count and average wage amount increases.  No tax credit is available for employers with more than 25 FTEs or whose average wage per employee exceeds $50,000. 

This maximum tax credit will increase to 50% of premiums paid by eligible small business employers (35% for tax-exempt organizations) in 2014.

Note that the employer's payment of at least 50% of the cost of single coverage applies to the employer's payment of a nonelective contribution (so that salary reduction contributions are not counted as employer contributions for this purpose) and the employer's payment of a portion of the premiums must be a uniform percentage of the premium cost.

These requirements are included because the tax credit is aimed at helping small employers that employ primarily low to moderate-income employees.  Note that the availability of the tax credit is based on the employer's FTEs, not the number of actual employees, so many businesses will be eligible for the tax credit even if they employ more than 25 employees.

Eligible employers can claim the credit as a general business credit on their 2010 income tax return (filed in 2011).  For tax-exempt employers, the IRS will issue additional information in the near future on how a tax-exempt employer will apply for the tax credit. 

Note,  however, that the employer may NOT take an income tax deduction for that portion of the premiums paid by the employer which is equal to the amount of the tax credit available for such premiums. 

This is the first of several Client Advisories that will be sent discussing the various provisions of the health care reform laws that are of interest to employers.  Watch for future Client Advisories as we continue to digest the provisions of this complex legislation.

Our Employee Benefits Team is available to answer any questions you may have on health care reform or any other employee benefit matter.

[*] This is going to get confusing.  First, the Patient Protection and Affordable Care Act of 2010 was approved by Congress and signed by President Obama on March 23, 2010.  Then, Congress approved and President Obama signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which made substantial changes to the Patient Protection and Affordable Care Act.  These Acts together have been commonly referred to as "health care reform laws."

________________________________________________________________

If you have any questions about this Client Advisory, please contact any member of our Employee Benefits Team.

Circular 230 Notice

This advisory contains provisions concerning a federal tax issue or issues. This advisory is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on any taxpayer by the Internal Revenue Service. For information about this statement, contact Sherman & Howard L.L.C. or visit our website at www.shermanhoward.com/PrivacyPolicy/Circular230/

©2010 Sherman & Howard                                                                  April 5, 2010