Tax Credit for Small Groups

Health Care Reform

The IRS and White House recently released materials clarifying information for those wishing to claim the Small Business Health Care Tax Credit for 2010 and there is a lot of good news!

This tax credit is retroactive back to January 1, 2010 and will give qualifying businesses a tax credit covering up to 35% of the premium they pay. In 2014 the tax credit will increase to 50%.

Qualifying

In order to qualify for the credit, the employer must not employ more than 25 full-time equivalent (2 part time = 1 full time) employees. Here’s the kicker – the average annual compensation of those employees must not exceed $50,000.

Good News: Owners (officers/partners/sole proprietors) and family members can be excluded from the salary computations.

Bad News: there is a phase out. The tax credit is scheduled to phase out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers. There is not enough information on this yet, so there's more to come...

Premium Limitations: To discourage employers to choose high-cost / benefit plans, an employer’s “eligible contribution” will be limited to the average cost of health insurance in that state.

Example

For a company consisting of:

  • 10 employees (less owners/family members),
  • $450,000 in wages ($45,000 per worker), and
  • $70,000 in Employer Eligible Health Care Costs,

Here is what the tax credits would be:

2010 tax credit: $24,500 (35% credit)
2014 tax credit: $35,000 (50% credit)

Key Facts about the Small Business Health Care Tax Credit

  • The tax credit, which is effective immediately, can cover up to 35 percent of the premiums a small business pays to cover its workers. In 2014, the rate will increase to 50 percent.
  • The Congressional Budget Office estimates that the tax credit will save small businesses $40 billion by 2019.
  • Both small for-profit businesses and small not-for-profit organizations are eligible.

Key Elements

  • Available Immediately. The credit is effective January 1, 2010. As a result, small businesses that provide health care for their workers will receive immediate help with their premium costs, and additional firms that initiate coverage this year will get a tax cut as well.
  • Broad Eligibility. The Council of Economic Advisors estimates that 4 million small businesses are eligible for the credit if they provide health care to their workers. Qualifying firms must have less than the equivalent of 25 full-time workers (e.g., a firm with fewer than 50 half-time workers would be eligible), pay average annual wages below $50,000, and cover at least 50 percent of the cost of health care coverage for their workers.
  • Substantial Benefit. The credit is worth up to 35 percent of a small business’s premium costs in 2010. On January 1, 2014, this rate increases to 50 percent.
  • Non-Profits Eligible. Tax-exempt organizations are eligible for a 25 percent tax credit in 2010. In 2014, this rate increases to 35 percent. (The credit rates are lower for non-profits to ensure that the value of the credit is approximately equal to that provided to for-profit firms that cannot claim a tax deduction for the amount of the credit claimed.)
  • Gradual Phase-Outs. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
  • Premium Cost Eligibility. To avoid an incentive to choose a high-cost plan, an employer’s eligible contribution is limited to the average cost of health insurance in that state.

You can expect more health care reform updates like this one throughout the year. We're eager to get information out to you as soon as possible, so you can benefit the most from the new legislation.

As always, we publish and advise when information is no longer “rumor and conjecture” but when actual rules and guidelines have been released and substantiated, and we feel confident in delivering this to you for your use.

For more general information on the coming changes, please see our detailed article on Health Care Reform.

As always, please contact us with questions or for more information. We'd also be happy to provide you with a health insurance quote.

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