Calculating the Small Employer Health Insurance Tax Credit for 2010

by Dorian Aiello, Managing Partner Aiello-Goodrich-Teuscher

For tax years beginning in 2010 through 2013, eligible small employers (including small Non-Profit Organizations) that purchase health insurance coverage for their employees may be eligible for a tax credit to offset the cost of insurance coverage. This is one of the few provisions of the new Health Care Act that is effective this year (2010).

Here is how the credit works:

  1. You have to qualify as an “eligible small employer” which is defined as an employer that has no more than 25 full-time equivalents (FTEs) during the tax year. A full time equivalent works 2080 hours per year. Seasonal workers are not counted in the calculations unless they work more than 120 days a year.
  2. The FTE’s average annual pay is not more than $50,000. This is calculated by dividing the total wages paid annually by the number of FTE employees.
  3. The employer has a qualified health insurance arrangement where employer uniformly pays greater than or equal to 50% of the employee-only health plan premiums for each enrolled employee. If an employer meets the minimum 50% threshold, but is not uniform across employees or employee classes, they would likely be eligible for “transition relief” and be deemed eligible for the credit for 2010.
  4. Self-employed individuals, including partners and sole proprietors, 2% shareholders or greater of an S Corp and their dependents are not treated as employees for purposes of calculating the credit.

The maximum credit amount for eligible small employers equals 35% (25% for NPOs) of the lesser of the contributions made to purchase health insurance coverage for its employees or the amount that would have been made had the employer been enrolled with a small business benchmark premium. The 2010 Small Employer Benchmark Premiums for California is $4,628 (Employee only coverage) and $ 9,677 for Family Coverage.

The maximum credit is available only to an employer with 10 or fewer FTEs whose average annual salaries are less than $25,000. Fortunately, a table is provided that estimates the applicable reduced credit percentage with varying levels of FTEs and average annual wages.

In conclusion, this new tax credit could be a welcome relief for small employers struggling to provide employees with health insurance coverage. For those employers providing less than 50% of the premiums, it might be worth reviewing what the cost/benefit would be to get to the 50% level. This new credit will be getting a lot of attention from the IRS, so stay tuned for additional guidance on implementation of it.

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