The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

IRS Offers Guidance on Health Insurance Tax Credit for Small Businesses

Posted by Alan on April 4, 2010


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.”

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5 Responses to “IRS Offers Guidance on Health Insurance Tax Credit for Small Businesses”

  1. joyce said

    Alan:

    Thanks for the info. Is this credit in addition to the deduction for employer payments, or instead of.

    Joyce

    • Alan said

      Joyce: Best to ask an accountant, but as I understand it the tax credit gets applied first and then the remainder is deductible as a business expense.

  2. Mike Habib said

    The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an exchange. More Info.

  3. Sabastian said

    This seems like a bad reform when you consider that it incentivizes businesses to stay below 25 workers, and to keep their wages below a $50k average. Worse, it incentivizes small employers to hire entry level workers at lower wages so that it can offer raises to its top talent. Someone coming in at $35k might be hired at $25k now so that employers can have flexibility to keep their top producers. And even worse, there is incentive to cut the mid-range workers in order to replace them with low wage earners in order to keep that $50k average.

    I guess we shouldn’t really look at this from a perspective of how it incentivizes a business owner to run their company. It may incentivize them to keep wages at lower levels, but at least more people could potentially be getting health care coverage.

  4. Malcolm Cutler said

    Alan,

    I am beginning to see interest coming from the employee level and being transferred to employers.

    I think their familiarity with the “Cobra subsidy,” and knowing the benefits to terminated employees, is translating into knowing the employer has a tax credit and they, the employees, might benefit from the employer’s tax credit.

    Malcolm

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