New Tax Credit Gives Break to Small Employers Contributing to Employee Health Plans
Editor's Note: Today's post was authored by FHWN attorney Sue Nolan.
The details on a new federal income tax credit for certain employers who make nonelective contributions towards employee health insurance premiums will be published next month in the Internal Revenue Service Bulletin.
Specifically, the new credit is designed to help small employers who have relatively low-wage employees. Businesses with 10 or fewer full-time equivalent employees earning less than $25,000 a year on average will be eligible in 2010 for a tax credit of 35% of health insurance costs. Companies with between 11 and 25 workers and an average wage of up to $50,000 are eligible for partial credits. On a state-by-state basis, this credit will change when the states set up Small Business Health Options Programs called "SHOP Exchanges" where small businesses can pool together to buy insurance. The SHOP Exchanges are required to be set up by 2014.
After the SHOP Exchanges are created, the tax credit will remain in place, increasing to 50% of health insurance costs for the first two years a company buys insurance through its state exchange.
Background
The Patient Protection and Affordable Care Act (PPACA) amends the Internal Revenue Code (by adding Section 45R) to provide a credit to small businesses for health insurance costs. The credit applies to any tax year beginning after December 31, 2009. There is a phase-out provision to limit the amount of the credit for small business employers who have more than 10 employees and/or whose average wage is higher than $25,000. Currently, there is a "transition" rule in place that applies until the sooner of 2014 or the time that the employer's state sets up a Small Business Health Options Program called "SHOP Exchange" where small businesses can pool together to buy insurance.
Current Provisions
Credit. The amount of the credit with respect to any eligible small business employer is equal to 35 percent (25 percent for a tax-exempt eligible small employer) of the lesser of (1) the eligible small employer's nonelective contributions for premiums paid for health insurance coverage for an employee or (2) an amount the Secretary of HHS determines is the average premium for the small group market in the State in which the employer is offering health insurance coverage or such area within the State as specified by the Secretary.
Phase-Out. The amount of the credit shall be reduced by the sum of the following:
(1) the amount of the credit multiplied by a fraction whose numerator is the total number of full-time equivalent employees of the employer in excess of 10 and the denominator of which is 15.
(2) the amount of the credit multiplied by a fraction the numerator of which is the average annual wages of the employer in excess of the dollar amount in effect under subsection (d)(3)(B) and the denominator of which is such dollar amount.
The dollar amount specified in (d)(3)(B) is currently $25,000.00. The amount of any credit taken reduces the employer's deduction for health care expenses.
After the jump - definitions
Definitions
Contribution Arrangement. A contribution arrangement is described in paragraph d(4) if it "requires an eligible small employer to make a nonelective contribution on behalf of each employee who enrolls in a qualified health plan offered to employees by the employer through an exchange in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the qualified health plan."
Eligible small business employer. An eligible small business employer is one "(A) which has no more than 25 full-time equivalent employees for the taxable year, (B) the average annual wages of which do not exceed an amount equal to twice the dollar amount in effect under paragraph (3)(B) for the taxable year, and (C) which has in effect an arrangement described in paragraph (4)." IRC ยง 45R(d)(1). The dollar amount specified in (3)(B) is $25,000.00 and the arrangement specified in paragraph (4) is the contribution arrangement described above.
Full-time equivalent employees. The term employees does not include a more than 5% owner of the business, a 2% or more shareholder of an S corp or any one considered to be self-employed or dependents of the foregoing. The term employee does include leased employees. Full-time equivalent employees means a number of employees equal to the number determined by dividing the total number of hours of service for which wages were paid by the employer to employees during the taxable year by 2,080 (rounded to the next lowest whole number if not a whole number). Hours worked in excess of 2080 are not taken into account.
Average Annual Wage. The average annual wages of an eligible small employer for any taxable year is the amount determined by dividing the aggregate amount of wages which were paid by the employer to employees during the taxable year, by the number of full-time equivalent employees of the employer for the taxable year.
Details on the new tax credit (Notice 2010-44) will be published in Internal Revenue Bulletin 2010-22, on June 1, 2010.
