Are You Eligible for the New Small Employer Health Insurance Tax Credit?

Your business may be eligible for the new Small Business Health Care Tax Credit. The credit, which was part of The Patient Protection and Affordable Care Act, is retroactive to tax years beginning in 2010 and is, therefore, available for the full calendar year of 2010 (for calendar year taxpayers).

Designed to encourage eligible small employers to offer health insurance coverage to their employees, the non-refundable credit is available to small employers that pay at least half the cost of single coverage for their employees.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. The maximum credit amount is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid for eligible tax-exempt organizations for 2010 through 2013.

The maximum credit amount will increase to 50 percent in 2014 and 2015 for eligible small businesses and 35 percent for eligible tax-exempt organizations, although many additional requirements will apply in those two years.

Generally, an eligible small business or tax-exempt organization is one that:

The maximum credit applies to those small businesses or tax-exempt organizations with no more than 10 full-time FTEs paying average annual wages of $25,000 or less. The credit phases out as the number of FTEs increases from 10 to 25 and as average annual wages increase from $25,000 to $50,000.

Only insurance premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) count when calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.

If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement, then the premium amount counted in calculating the credit would be only the portion paid by the employer. In addition, the amount of an employer’s premium payment used in computing the credit is capped by substituting the actual premium payments made by the employer with the average premium for the small group market in the state (or an area within the state) in which the employer offers coverage, as determined by the Department of Health and Human Services (HHS).

The number of an employer’s FTEs is determined by dividing the total hours for which the employer pays wages to the employees during the year (but not more than 2,080 hours for any employee) by 2,080. Average wages of employees are determined without regard to any owner or owner family salaries. Special rules apply for seasonal employees and for businesses with common ownership.

Small business employers will be able to claim this non-refundable credit as part of the general business credit, and, by special rule, can fully offset alternative minimum tax. As a general business credit, any unused credit amount can generally be carried back for one year and carried forward up to 20 years. Please note that as with many other tax credits, the ultimate amount of credit claimed by the eligible small business reduces the health insurance premium deduction of that small business.

Small tax-exempt employers will be able to claim this non-refundable credit against payroll taxes.

Example: For the 2010 tax year, a qualified small business employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the
requirements for the credit.

The credit is calculated as follows:

1. Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600
2. Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
3. Credit reduction for average annual wages in excess of $25,000:($33,600 x $5,000/$25,000) = $6,720
4. Total credit reduction: ($4,480 + $6,720) = $11,200
5. Total 2010 tax credit: ($33,600 – $11,200) = $22,400
6. Total tax deduction for health insurance premiums paid: ($96,000 – $22,400) = $73,600

If you have any questions about the Small Employer Health Insurance Tax Credit, please contact your Cherry, Bekaert & Holland, LLP advisor.

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Below are two charts prepared by the Congressional Research Service (CRS) that show the amount of the credit as a percentage of employer contribution toward workers’ health insurance. These are not official tables but rather give an idea of what the credit percentage will be based on the number of employees and their average wages.

Table 1. Small Business Tax Credit as a Percent (Maximum of 35%) of
Employer Contribution to Premiums, For-Profit Firms in 2010-2013 and Nonprofit Firms in 2014+

	Average Wage
Firm size	Up to $25,000	$30,000	$35,000	$40,000	$45,000	$50,000
Up to 10	35%	28%	21%	14%	7%	0%
11	33%	26%	19%	12%	5%	0%
12	30%	23%	16%	9%	2%	0%
13	28%	21%	14%	7%	0%	0%
14	26%	19%	12%	5%	0%	0%
15	23%	16%	9%	2%	0%	0%
16	21%	14%	7%	0%	0%	0%
17	19%	12%	5%	0%	0%	0%
18	16%	9%	2%	0%	0%	0%
19	14%	7%	0%	0%	0%	0%
20	12%	5%	0%	0%	0%	0%
21	9%	2%	0%	0%	0%	0%
22	7%	0%	0%	0%	0%	0%
23	5%	0%	0%	0%	0%	0%
24	2%	0%	0%	0%	0%	0%
25	0%	0%	0%	0%	0%	0%

Table 2. Small Business Tax Credit as a Percent (Maximum of 50%) of
Employer Contribution to Premiums, For-Profit Firms in 2014+

	Average Wage
Firm size	Up to $25,000	$30,000	$35,000	$40,000	$45,000	$50,000
Up to 10	50%	40%	30%	20%	10%	0%
11	47%	37%	27%	17%	7%	0%
12	43%	33%	23%	13%	3%	0%
13	40%	30%	20%	10%	0%	0%
14	37%	27%	17%	7%	0%	0%
15	33%	23%	13%	3%	0%	0%
16	30%	20%	10%	0%	0%	0%
17	27%	17%	7%	0%	0%	0%
18	23%	13%	3%	0%	0%	0%
19	20%	10%	0%	0%	0%	0%
20	17%	7%	0%	0%	0%	0%
21	13%	3%	0%	0%	0%	0%
22	10%	0%	0%	0%	0%	0%
23	7%	0%	0%	0%	0%	0%
24	3%	0%	0%	0%	0%	0%
25	0%	0%	0%	0%	0%	0%