Small Business Health Insurance Credit Explained

When the Patient Protection and Affordability Act became law this past March, many small businesses immiately qualifi for a substantial, retroactive tax crit – a crit that will ruce their health insurance cost by up to 35 . What had remain unclear, however, was a detail definition of which employers, employees and policies qualify for the crit.

Fortunately, the IRS recently releas guidance to answer these questions. Unfortunately, this guidance complicates what originally seem a straightforward proposition. Does your business or organization qualify for the Small Employer Health Care Crit? Today, we’ll assemble some of the crit’s major components to help you truct an answer.

To qualify for the health care tax crit, businesses and tax-exempt organizations must meet three criteria: First, pay at least 50 of their employees’ single-rate health care premiums; Second, employ less than 25 “full-time equivalent” employees; and third, pay these FTEs an average of less than $50,000 per year.

Qualifying employers also must utilize a “qualifying arrangement” and pay at least 50 of employees’ health insurance premiums when calculat at the single (worker-only) rate. A qualifying arrangement exists if the employer pays a “uniform age” (the same age for each employee) of at least 50 of each employee’s single-rate health care premium. However, for 2010, this rule is relax. A “qualifying arrangement” will be ider to exist so long as the employer pays at least 50 (but not necessarily the same age) of premiums for each employee enroll in employer-offer coverage.

Although total premiums are utiliz when deterng whether an employer has paid a qualifying age of premiums, only premiums actually paid by the employer are us to calculate the crit. For example, if the employer pays 60 of an employee’s coverage, only the premium actually paid by the employer (60 ) is utiliz to calculate the crit.
The amount of premium that can be us to calculate the crit also is capp by the average premium paid for “small group” market coverage in the state (or geographic area) where the insurance is offer. This small group premium limit is detin by the Department of Health and Human Services and published via Revenue Ruling 2010-13. When calculating the amount of “qualifying premium,” employers must use the lesser of the single-rate premium actually paid for the employee (calculat at the employee-only rate) or the amount list on Revenue Ruling 2010-13.

Several additional calculations must be made to detine whether or not the employer is eligible for the crit. First the employer must calculate their number of FTEs. To calculate the number, take the total work by all employees (do not count over 2,080 for any one employee) and divide that total by 2,080 – then, round the answer up to the next whole number. Employers also must detine the average wage paid to each FTE. The average wage per FTE is calculat by taking the total wages paid during the tax year, dividing it by the total number of FTEs, then rounding down to the nearest $1,000. When deterng the number of FTEs and average wage, do not include the or wages of seasonal workers (working less than 121 days per the tax year), business owners or the family members of business owners. But be careful – there are special rules for deterng which owners or family members to exclude.

Businesses and nonprofits that employee less than 25 FTEs who earn an annual average of less than $50,000 qualify for the crit. Through , the maximum crit is 35 of qualifying premiums for small businesses and 25 for nonprofits. The crit, however, is skew so that only employers who employ 10 FTEs or less who earn an average of $25,000 or less qualify for the maximum crit. The crit is ruc for employers with FTEs or average wages exceing these amounts. This too requires additional calculations.
Today we truct a bare-bone skeleton of the Small Employer Health Insurance Crit. We did not flesh out details that may impact your specific business or organization. This crit will prove a valu tool for many businesses struggling to provide their employees health care coverage. But it is also cumbersome, complex and should not be claim without some professional guidance. For more information, please free to contact our office or ult with another qualifi tax professional.

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