What Employers Are Eligible for the Health Insurance Tax Credit?

This week’s question:

Under the new health reform law, I understand that certain small employers are eligible for a tax credit for providing health insurance coverage to employees.  What employers are eligible for the credit?

PPACA adds a new small business tax credit for employee health insurance expenses paid by certain small employers, effective beginning in 2010.  On May 17, 2010, the Internal Revenue Service issued Notice 2010-44 (the “Notice”), which provides important details on which employers can claim the small business health insurance tax credit and how the credit is calculated and claimed.

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.  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.

Seasonal workers who work 120 days or less during the year are disregarded in determining FTEs and average annual wages.  For the following types of workers, hours worked and wages are disregarded in determining FTEs and average annual wages:

1) certain self-employed individuals, including sole proprietors and partners;

2) shareholders owning more than 2% of an S Corporation;

3) more than 5% owners of the business; and

4) certain family members of these workers and owners.

An employer’s FTEs are calculated by dividing (1) the total hours of service worked (not more than 2,080 for any employee) by all employees of the employer that are taken into account, by (2) 2,080, with the result then rounded down to the next lowest whole number.  To determine average annual wages, the employer divides the total wages subject to FICA (without regard to the wage base limitation) paid by the employer to employees for the “hours of service” taken into account during the taxable year, by the number of FTEs, rounded down to the nearest $1,000.

Hours of service include (1) each hour for which an employee is paid, or entitled to pay, for work performed; and (2) each hour for which an employee is paid, or entitled to pay, for periods the employee did not perform work due to a vacation, holiday, illness, incapacity disability, layoff, jury duty, military duty or leave of absence (maximum 160 hours for a single continuous period).  The Notice also permits using either an 8 hours/day or 40 hours/week equivalency.

To be eligible for the credit, the small employer must pay a uniform percentage of at least 50% of total premium cost in order to be eligible for the credit.  For 2010, a special transition rule applies under which an employer that pays at least 50% of the premium for single (employee-only) coverage for each enrolled employee will qualify even if the percentage is not the same for each employee and even if the employee is enrolled in more expensive coverage such as family coverage.

Beginning in 2014, the credit will only be available to employers who provide health coverage through one of the new exchanges established under PPACA, and only will be available for two consecutive years. 

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Got a health-care reform question?  You can ask YOUR health-care reform legislation question online at http://www.surveymonkey.com/s/second_opinions 

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You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html  

Contributors:

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.