Guidance on Small-Employer Health Care Credit

Dear Client:

The IRS has released guidance on computing the health insurance tax credit for eligible small employers that make nonelective contributions toward their employee’s health insurance premiums.

The Patient Protection and Affordable Care Act added a provision that allows eligible small employers a tax credit for nonelective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of participating employees. The amount of the credit is equal to 35 percent of the lesser of:

  1. the total amount of the nonelective contributions the employer makes on behalf of its employees during the tax year under a contribution arrangement for the payment of premiums for qualified health insurance coverage of its employees, or
  2. the total amount of nonelective contributions that would have been made during the tax year if each employee taken into account in item (1) had enrolled in a qualified health plan that had a premium equal to the amount that the Secretary of Health and Human Services determines is the average premium for the small group market in the state in which the employer is offering health insurance coverage (or the area within the state that is specified by the Secretary of Health and Human Services).

An employer determines its status as an eligible small employer each tax year. An employer is an eligible small employer if the following conditions are met:

  • it has 25 or fewer full-time equivalent (FTE) employees;
  • the average annual wages of these employees are not greater than twice the applicable dollar amount for the tax year ($25,000 in tax years beginning in 2010 through 2013); and
  • the employer has a qualified health care arrangement in effect.

Certain employees are excluded from the determination of FTEs. Excluded employees are sole proprietors, partners in a partnership, shareholders owning more than 2 percent of an S corporation, and any owners of more than 5 percent of other businesses. Family members of these owners and partners are also not taken into account as employees.

The IRS guidance clarifies, among other things, how employers calculate the credit, the types of coverage that are eligible for the credit, and the interaction of the federal tax credit with state tax credits. In addition, the IRS provides the average premium for the small group market in each state for the 2010 tax year for purposes of computing the amount of the credit.

The health insurance tax credit for small employers is one of many provisions of the Patient Protection and Affordable Care Act that encourages the shared responsibility for health insurance coverage of all Americans. If you have any questions regarding your eligibility or the calculation of the credit, please call our office at your earliest convenience.

Sincerely yours,

Arthur Lee Moye III
Certified Public Accountant
MBS Accountancy Corporation