The Internal Revenue Service recently issued guidance to assist employers in determining if they are eligible for the small employer tax credit provided by the new healthcare reform laws. This guidance, which is available on the IRS Small Business Healthcare Tax Credit website, includes a fact sheet, examples of how the credit applies to employers in different circumstances, and a list of frequently asked questions and corresponding answers. The following is a detailed overview of the guidance from an employer’s perspective:

Eligible Small Employers
In order to be eligible for the tax credit, an employer must:

• Contribute at least 50% of the cost of healthcare coverage for its employer-sponsored health plan based on the single or employee-only rate;
• Employ less than 25 full-time equivalent employees; and
• Pay average annual wages below $50,000.

The tax credit is available for both taxable/for-profit companies and tax-exempt organizations. 

Determining Amount of Employees and Average Wages
In determining whether an employer meets the thresholds for number of employees and average annual wages, full-time equivalent employees must be considered.  However, owners (sole proprietors, partners in a partnership, shareholders owning more than 2 percent of an S corporation, and owners of more than 5 percent of other businesses) are not considered employees, and therefore, they are not counted in determining the number of full-time equivalents or the average annual wages.  Premiums paid on behalf of owners are not counted in determining the employer’s credit.

Amount of Tax Credit
The maximum amount of the credit is 35% of a small employer’s premium costs in 2010 (25% for tax-exempt organizations).  The full amount of this credit is available to employers with 10 or fewer employees with average annual wages of less than $25,000.  The credit is phased out for employers with average wages between $25,000 and $50,000 and between 10 and 25 full-time workers.

On January 1, 2014, this credit increases to 50% for taxable employers and 35% for tax-exempt organizations.

Claiming the Credit
Eligible small businesses can claim the credit on their annual tax return for 2010, which is filed in 2011.  More guidance will be forthcoming from the IRS as to how eligible tax-exempt organizations claim the credit.  The employer’s tax deduction for health insurance premiums is reduced by the amount of the credit claimed by the employer.

As additional guidance and regulations become available for healthcare reform law provisions, HCW will continue to keep you updated through our Compliance Alerts. In the meantime, if you have any questions about healthcare reform or the small employer tax credit, please email reform@hcwbenefits.com or call our office at (919) 403-1986.