IRS Offers Guidance on Health Insurance Tax Credit for Small Businesses

One of the first benefits to arrive from the Patient Protection and Affordable Care Act, the health care reform bills signed into law by President Barack Obama, is the assistance it provides small businesses in providing coverage for their employees. The tax credits are available beginning with the 2010 tax year and can reimburse small employers for as much as 35 percent of their contribution to worker  health insurance premiums for eligible employers. The IRS has recently issued guidelines concerning the small business health care tax credit. The process for determining if the you or your group qualify for the tax credit — and if so, for how much of one — requires some careful calculations (these are IRS guidelines after all). But those calculations are fairly straightforward (as these things go). Which makes spending some time with the IRS FAQs well worth the time.

(Please note: I’m not giving tax advice here nor am I qualified to do so. I’m simply reading through the IRS’ FAQ and commenting on some interesting aspects of the tax credit — as I understand them. Consult with your tax advisor before taking any action).

The full tax credit (35 percent) is available to qualified employers with 10 or fewer workers (not counting the owner and family members on the payroll) whose workers earn, on average, less than $25,000 annually. “Workers” in this context are not physical bodies, but “full-time equivalents” or “FTEs”. Calculating FTEs is simple: a full-time employe is expected to work 2080 hours per year. Simply add up the number of hours actually worked by each employee and divide the total by the number of bodies on the payroll (rounding down to the lowest whole number). Determining the average salary of these employees is easy, too. Take the total annual wages paid by the company and divide it by the number of FTEs. (The IRS health care tax credit FAQ provides examples). That the IRS is not counting business owners in this calculation will significantly increase the number of firms considered to be qualified employers.

Qualified employers with up to 25 FTEs and providing average wages of up to $50,000 are also eligible for a smaller tax credit on health insurance premiums they pay. The formula for determining the dollar amount of their tax credit is in the IRS FAQ.

One interesting twist: the premium paid by the small businesses against which the tax credit is calculated is capped by the average premiums paid by small business the in the state. (The IRS will be publishing a list of those averages later this month). So as noted before, there’s some careful calculations required to determine eligibility and the credit amount.

Still, a subsidy is a subsidy is a subsidy. And for small business owners this is a welcome subsidy. The Kaiser Family Foundation in their 2009 Employer Health Benefits Survey reports that only 46 percent of companies with 3-to-9 employees and 72 percent of firms with 10-to-24 workers offer health insurance coverage. Any uptake in the number of these firms will reduce the number of uninsured in this country. And a 35 percent tax credit could make a big difference in those uptake numbers.

My thanks to Bruce Jugan over at BenefitsCafe  who brought the IRS FAQ to my attention. The IRS will be providing additional details concerning the tax credits by the end of April. But so far, as Mr. Jugan notes, the guidelines they have provided so far “look good.”