last update 5-01-2010
SMALL BUSINESS HEALTH INSURANCE CREDIT
Small Employers Encouraged to Take Advantage of New Health Insurance Coverage Credit
There is a new credit that small businesses can
explore and, if qualified, claim the new small health insurance coverage credit created by the
Patient Protection and Affordable Care Act, which is available for tax years
beginning in 2010 (IRS News Release IR-2010-38).
The credit is meant to provide a boost to eligible small businesses by helping them afford health
coverage for their employees. Small
businesses should look closely at this important tax break which is
already effective to see if they qualify.
The credit was created for eligible small businesses to either
maintain their current health insurance coverage or to begin offering health insurance coverage to
their employees. The credit is specifically targeted at employers that primarily employ low-income and
Generally, an eligible small business is one that pays at least half the
cost of single coverage, that employs less than 25 full-time equivalent (FTE) employees, and that
pays an average annual salary of less than $50,000 per employee. The maximum credit amount is 35 percent of
premiums paid by eligible small businesses and 25 percent for eligible tax-exempt organizations
for 2010. The maximum credit amount will increase beginning in 2014 to 50 percent for eligible
small businesses and 35 percent for eligible tax-exempt organizations. To reduce the incentive to
choose a high-cost plan, the amount of the employer's contribution that can be used to calculate
the credit is limited to the average cost of health insurance in the employer's State.
The maximum credit may be claimed by employers with 10 FTE employees paying wages of
$25,000 or less. The credit phases out ratably both for firms with average wages between
$25,000 and $50,000 and for firms with between 10 and 25 FTE employees. Thus, a firm with
between 10 and 25 FTEs and that paid average wages between $25,000 and $50,000 would need
to reduce the amount of the credit for both phase-outs.
The total amount of the phase-out for a given small employer is the sum of:
1. the credit amount multiplied by the number of the employer's full-time equivalent employees
2. for the tax year in excess of 10, divided by 15; and
3. the credit amount multiplied by the employer's average annual wages in excess of the
applicable dollar amount for the tax year, divided by the applicable dollar amount.
The credit may be claimed as part of the general business credit. Small businesses may take the
credit for up to six years 2010 through 2013 and any two years thereafter.
A fact sheet released by the White House provides four examples of employers who can benefit
from the credit. In the first example, an auto shop with 10 employees and total wages of
$250,000 ($25,000 average) has health care costs of $70,000. The employer can claim the full
amount of the credit, which would be equal to $24,500 in 2010 (35-percent credit) and 50 percent
in 2014 (50-percent credit).
In the second example, a restaurant has 40 half-time employees (20 FTE employees) and pays
wages of $500,000 (or $25,000 per FTE worker). The employer's health care costs are $240,000.
After applying the phase-out (because the employer has more than 10 FTE workers), the
employer may claim a credit of 28,000 for 2010 and $40,000 for 2014.
In the third example, a foster-care nonprofit with nine employees and average wages of $22,000
per worker has health care costs of $72,000. Since lower percentages apply in determining the
credit available to nonprofits, it could claim a credit of $18,000 in 2010 (25-percent credit) and
$25,200 in 2014 (35-percent credit).
In the final example, a manufacturing company with twelve employees, who are paid an average
of $35,000 each, has health care costs of $90,000. It is required to phase out the credit both for
number of employees and for its average wages. Thus, it may claim a credit of $14,700 for 2010
and $21,000 for 2014.
The IRS will provide further guidance on claiming the credit for tax-exempt organizations. The
IRS will also be mailing a postcard with key information to
potential qualifying small businesses. In addition, the IRS will hold workshops and
small business forums that will include discussion of the small employer health insurance credit.
More data can be obtained at the IRS website.
======================== WARNING =======================
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed. Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a
attorney to discuss the specific facts of your case
and the law of your state.
If you live in Louisiana and want to talk about your situation, please
call me at the number below. Fees will be charged after initial consultation.
Marvin E. Owen
3036 Brakley Drive
Baton Rouge, La 70816
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