Tax Credit for Small Employer Health Insurance
The
new Health Care Reform Act (HCRA) provides a tax credit to certain small
businesses for health insurance premiums paid in 2010. This is a “credit”
against the income tax liability rather than a “deduction” used in computing
taxable income. If the credit cannot be fully used in 2010, it can be carried
forward to future years, but not back to prior years.
The
credit is available to certain small employers who meet the following criteria:
(1) number of employees -- 25 or less; (2) average annual wages -- $50,000 or
less; (3) maximum credit 2010-2013 -- 35% of health insurance premiums paid; and
(4) minimum percentage of premiums paid by employer -- 50% or more before the
credit can be claimed, i.e., the employer must pay at least 50% of total health
insurance premiums of the employees.
If
an employer does not meet the above criteria because it has too many employees
or the average annual salaries are too great, there may be no credit, but
attention needs to be given to how employees are counted.
In some cases the actual numbers of employees can exceed 25 and the
credit can still be claimed because of the definition of who is an
“employee.”
The
definition excludes certain principals such as owner-managers and their families
as well as seasonal workers from the “employee count.” For example a 2% (or
greater) owner of an S corporation, the head of a regular corporation, the
managers and their family members of LLCs, and partners in partnerships do not
have to be counted as employees.
Let’s
say ABC Corp has a principal shareholder-president, Mr. Big and three “Big”
family members working among a total of 27 employees.
If Mr. Big and the three “Big” family members are subtracted from the
total number of employees then the number of eligible employees falls below 25
and ABC may be eligible for the credit.
Similarly, if the “Bigs” are excluded from the “wages”
calculation it will be easier to attain lower average annual compensation
figures.
For
part-time employees, the equivalent of a regular employee needs to be calculated
in some instances so that the number of hours worked by part-time employees is
equated to the number of hours worked by full-time employees for purposes of the
credit. In addition, seasonal workers do not have to be included in the employee
count.
If
the business has 10 or fewer employees with average annual compensation of
$25,000 or less, then the maximum credit of 100% of health insurance premiums
paid is available. The same rules for counting employees and computing average
wages apply. Regardless of size, the
100% credit will not be available unless the premiums paid by the quite small
employer are at least 50% of the total amount paid for health insurance premiums
for all eligible employees.
If
the number of employees exceeds 10 (but less than 25) or the average annual
compensation exceeds $25,000, the credit is reduced by an amount which must be
separately computed. Without showing
all of the calculations, an example would be XYZ, Inc., which has 12 full-time
employees with average wages of $30,000 and pays $96,000 in premiums in 2010.
According to IRS guidance, the credit reduction is $11,200, which reduces the
maximum credit of $33,600 (35% times
$96,000) to $22,400 ($33,600 - $11,200).
Health
insurance premiums paid in 2010 before the law was signed can be included in the
calculations of total health premiums paid for the year 2010. The credit, if
available, results in a reduction of the amount of insurance premium deductions
for the employer. For example, if the employer paid $80,000 of insurance
premiums in 2010 and had a credit of $28,000, then the insurance premium
deduction would be reduced from $80,000 to $52,000 ($80,000 - $28,000).
Can
tax exempt organizations with employees who receive health benefits qualify for
the credit? Yes.
Since such organizations do not pay income tax, the credit is a
“refundable credit” meaning they receive the credit in cash from the IRS.
If
you have questions about the eligibility for, or calculation of, the 2010 HCRA
tax credit, you can review PDF files containing a detailed outline of a speech prepared by us for
various organizations in Virginia or a set of Frequently
Asked Questions prepared by the IRS guidance.
Copyright 2010
Published by the law firm of Newland & Associates, PLC
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