Hertsel Shadian, Attorney at Law, LLC

New Tax Credit Helps Small Employers Provide Health Insurance Coverage

5 April 2010

Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees will now qualify for a special tax credit.  Included in the health care reform legislation, the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama on March 23, 2010, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

The goal of the credit is to provide a boost to eligible small businesses by helping them afford health coverage for their employees.  To this end, the government is urging small businesses and tax-exempt employers to look closely at this important tax break—which is already effective—to see if they qualify.

The maximum credit is 35% of premiums paid in 2010 by eligible small business employers and 25% of premiums paid by eligible employers that are tax-exempt organizations.  In 2014, this maximum credit is scheduled to increase to 50% of premiums paid by eligible small business employers and 35% of premiums paid by eligible employers that are tax-exempt organizations.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. However, since the eligibility formula is based in part on the number of so-called FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.  The maximum credit goes to smaller employers—those with 10 or fewer FTEs—paying annual average wages of $25,000 or less.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit. The IRS plans to use postcards to reach out to millions of small businesses that may qualify for the credit. The postcards will encourage small business owners to take advantage of the credit if they qualify.

More information about the credit, consult your professional tax preparer or tax advisor, or see the additional information available on the IRS Web site at www.IRS.gov