How Do You Calculate the Small Business Tax Credit Under PPACA?

May 3, 2011 ( - PPACA added a new small business tax credit for employee health insurance expenses paid by certain small employers, effective beginning in 2010.  

In general, the credit is limited to small employers (both taxable and tax-exempt employers under Code section 501(c)) with less than 25 full-time equivalent employees (“FTEs”) with average annual wages of less than $50,000, and to receive the full credit, an employer may have no more than 10 FTEs and average wages of no more than $25,000.  The credit is phased out as the number of FTEs increases from 10 to 25 and as average annual wages increase from $25,000 to $50,000.

The IRS has issued various pieces of guidance regarding which employers are eligible for the credit and how the credit is calculated, most recently Notice 2010-82.  Below are some questions we have gotten regarding various issues addressed in the guidance.

I understand that the tax credit is limited by the average premium for the small group market in the state (or area within the state) in which employees are covered.  What happens if an employer employs employees in more than one state?

Revenue Ruling 2010-13 lists the applicable average premium for employee-only and family plans in the small group market in each state for the 2010 taxable year.  Notice 2010-82 clarifies that if an employer has employees in more than one state, the employer applies the average premium limitation separately for each employee based on the average premium for the state in which the employee works.

Do employer contributions to account-based plans like HRAs or health FSAs count for purposes of the tax credit? 

No, only arrangements where the employer pays premiums for an employee to be enrolled in health insurance coverage are considered a “qualifying arrangement” eligible for the tax credit.  Notice 2010-82 confirms that health reimbursement arrangements (“HRAs”) and health Flexible Spending Arrangements (“FSAs”) are self-insured plans and are not considered qualifying arrangements.

Are contributions by an employer to a multiemployer health plan eligible for the tax credit? 

Notice 2010-82 provides that contributions by an employer to a multiemployer plan that are used to pay premiums for health insurance coverage for employees covered by the plan are treated as the payment of health insurance premiums by the employer and are eligible for the tax credit.  However, employer contributions to a multiemployer plan that is self-insured are not eligible for the tax credit. 

Are terminated employees taken into account in determining an employer's total number of employees for purposes of the credit?

Notice 2010-82 clarifies that employees who were terminated during the year – as well as employees covered under a collective bargaining arrangement and employees who do not enroll in their employer's health insurance plan -- are all counted for purposes of determining the number of full-time employees and the average annual wages.



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Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C.  She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare.  She represents employers designing health plans as well as insurers designing new products.  Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.  

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.