Tax Quarry

It’s finally here.  Health Reform.  It comes to us in a package called the Affordable Care Act (ACA).  While all the provisions of the ACA that were passed by Congress will take years to fully phase in, some of the benefits of the health reform bill can be accessed immediately.  This is great news, especially for small businesses that historically have found the cost of health care to be a crippling obstacle to them in offering health insurance to their employees.

Included in the ACA approved by Congress in March and signed into law by the President, the small business health care tax credit, which is in effect this year, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

The Internal Revenue Service today issued new guidance to make it easier for small businesses to determine whether they are eligible for the new health care tax credit under the Affordable Care Act and how large a credit they will receive.  The guidance makes clear that small business receiving state health care tax credits may still qualify for the full federal tax credit.  Additionally, the guidance allows small businesses to receive the credit not only for regular health insurance but also for add-on dental and vision coverage. 

Notice 2010-44 provides detailed guidelines, illustrated by more than a dozen examples, to help small employers determine whether they qualify for the credit and estimate the amount of the credit.  The notice also requests public comment on issues that should be addressed in future guidance. 

For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by eligible small business employers and 25% of premiums paid by eligible employers that are tax-exempt organizations.  The maximum credit goes to smaller employers – those with 10 or fewer full-time equivalent (FTE) employees – paying annual average wages of $25,000 or less.  The credit completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more.  Because the eligibility rules are based in part on the number of FTEs not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011.  For tax-exempt organizations, the IRS will provide further information on how to claim the credit. 

For more information, search for the Affordable Care Act in Google or other search engines to locate the step-by-step guide and frequently asked questions on the IRS website.

Marsha Henry
Tax Quarry
May 18, 2010