Health Care Reform: 2010 Tax Benefits

Tax Credits for small businesses and certain tax-exempt employers that provide health care coverage.

President Obama signed The Patient Protection and Affordable Care Act (“the Act”) into law on March 23, 2010. Separately, on March 25, 2010, the Senate and House passed the Health Care and Education Reconciliation Act of 2010 (“the Reconciliation Act”) amending many provisions of the Act. The Reconciliation Act was signed into law by President Obama on March 30, 2010. The tax provisions contained in this major health care overhaul are the subject of a series of Insight articles. The focus of this Insight is the tax credit for small businesses and certain tax-exempt employers that provide health care coverage to their employees.

Beginning in 2010, the health care reform package provides a tax credit for small employers and eligible tax-exempt organizations designed to help offset the cost of providing employee health insurance. Generally, to qualify for the credit, a small business or tax-exempt organization must have no more than 25 full-time equivalent employees, pay average annual per employee wages of less than $50,000, and contribute at least 50 percent of the cost of health insurance coverage of its participating employees.

Small Business Tax Credit

In 2010 through 2013, qualified small employers may qualify for a tax credit for up to 35 percent of the lesser of:

(1) their contribution toward the employee’s health insurance premium; or
(2) the average premium for the small group market in the employer’s state.

The Secretary of Health and Human Services will determine and publish the appropriate small group market rates for credit purposes. It should also be noted that only non-elective premiums paid by the employer qualify for the credit. Salary reduction premium contributions are not counted toward the credit.

The credit is phased out for employers that have between 11 to 25 employees and pay average annual wages of $26,000 to $50,000. Generally, only small employers with 10 or fewer employees and that pay average annual wages of less than $25,000 would be eligible for the full credit. The average wage thresholds will be indexed for inflation after 2013.

Certain employees will not be eligible for the credit. Ineligible employees include:

(1) Seasonal workers;
(2) Self-employed individuals;
(3) 2 percent shareholders of S corporations;
(4) 5 percent owners of a small business; and
(5) dependents or other household members of the above.

Leased employees, however, are eligible employees for the credit.

The employer’s deduction for health insurance cost is required to be reduced by the amount of the credit claimed. Also, the credit is allowed against the Alternative Minimum Tax (AMT).


Small Tax-exempt Employers

An eligible tax-exempt small employer means an eligible small employer which is any organization described in Internal Revenue Code (“IRC”) Section 501(c) which is exempt from taxation under IRC Section 501(a). For these tax-exempt employers, the maximum credit is 25 percent of the employer’s cost of health insurance for 2010 through 2013. However, the refundable credit is limited to the amount of payroll taxes of the tax-exempt employer.

Years after 2013

After 2013, small employers that purchase insurance coverage through an insurance exchange may qualify for a credit for two years of up to 50 percent of their contribution to premiums. For tax-exempt employers, the credit rate will increase to 35 percent.

Summary

The new small business and tax-exempt employer tax credit will help small employers offset the cost of providing health insurance coverage to employees. The Internal Revenue Service has announced that one of their priorities will be to issue guidance on the new small business tax credit. We will keep you informed as this guidance is released. 

We encourage you to bookmark our web page dedicated to Health Care Reform for periodic updates.

Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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