small business health insurance tax credit

The recently enacted healthcare legislation includes many tax changes including the new health insurance tax credit for eligible small businesses. This particular credit is one of the more significant changes that takes effect this year and could benefit some small businesses. Here's what you need to know.

Who is Eligible?

Any type of business including C and S Corporations, Partnerships, LLCs, and Sole Proprietors is eligible. Eligibility requirements: businesses must have fewer than 25 Full Time Employees ("FTE's") equivalent employees; workers' average wages must be under $50,000; non elective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of its participating employees.

Which Payments Qualify?*

Thirty-five percent of employer paid healthcare insurance premiums qualify for the credit. A qualified health plan does not include amounts from a cafeteria plan or salary reduction agreement. The amount paid by the employer must be in a uniform percentage for all employees and cannot be an amount under 50% of the cost of the plan except where transition rules apply.

The Secretary of Health and Human Services ("HHS") will also designate the maximum premiums that do qualify based up on the small group market rate in which each company enrolls for coverage. For instance, if the HHS rate for your area is $35,000 based upon your amount of employees and you paid $40,000, only the lesser of the two amounts will be eligible for the credit.

Keep in mind, for calendar years beginning 2010 to 2013, the applicable credit amount is for 35% of the employer premiums paid. Whereas years after, the applicable credit amount is limited to 50% of the employer premiums paid.

*Special transition rules apply for tax years ending in 2010 if there is not a uniform percentage of premiums being paid, the company may still be eligible for the credit.

How do I determine My Company's Credit?

A credit is calculated around three factors:

1. Determine how many FTE's your company employs, with special exclusions from the total  for the owners of companies. The credit starts a phase out at 10 employees and is then entirely phased out for companies with over 25 Full Time Employees, but it is possible to have 40 Part Time Employees and still be eligible for this credit. Full Time Employees are based on a 40 hour work week. See below FTE's Phase Out for an example.
2. Determine the average wages paid for the year to those FTE's above, and then the credit begins to phase out at $25,000 and is completely phased out if the average wage is $50,000 or more. See below Wage Phase Out for an example.
3. Whether or not the payments qualify for the credit, as described in the What Payments Qualify Section.

Example:

The total cost in 2010 of a company's health insurance premiums related to FTE's is $40,000, which is below the HHS premium for the small group market in the applicable rating area. Of the $40,000, only half (50% or $20,000) of the total premiums are paid by the employer the other portion is part of a employees salary reduction agreement. The employer calculates that they have 20 FTE's while excluding the owners of the company from this calculation.  As well, the company determines the average salary for their full time employees is $30,000 ("Annual Salary"). Their credit would be determined as follows:

How do I get my money?

The credit will be applied against the company’s income tax liability as part of the General Business Credit although a non refundable credit, it can be used to offset an AMT liability. The credit will be first available on the company's tax filings for years ending in 2010. Certain tax-exempt entities (such as a 501(c)(3)) will also qualify for this credit, and the IRS will, but has yet to provide further information on how the organizations should claim the credit.

If you have any questions, please contact Feeley & Driscoll's Boston Accounting team, Email us or call 1 (888) 875-9770.

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