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Focus On Small Business: Health Insurance Tax Credit

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As you may know, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (2010 Health Care Reform Act) became law in March of 2010.
December 6, 2010

As you may know, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (2010 Health Care Reform Act) became law in March of 2010.

While many of the significant provisions will not be effective until 2014 and beyond, there is one provision that could benefit some small businesses in 2010. Namely, the health insurance tax credit. This provision of the healthcare reform law provides for a tax credit to those small employers that meet the following criteria:
  • have fewer than 25 full time equivalent (FTE) employees
  • average annual wages of less than $50,000 per FTE
  • pay at least 50 percent of the health insurance premium cost (i.e. a qualified arrangement)

The credit is available to both non-tax exempt and tax exempt organizations. Starting in 2010 through 2013, the amount of the credit, for non-tax exempt organizations, is equal to 25 percent of the health insurance premiums paid by the employer and 35 percent for tax exempt organizations. For 2014 and 2015, the credit increases to 50 percent and 35 percent for non-tax exempt and tax exempt organizations, respectively. However, for these years, the employer would be required to purchase the qualified insurance through the health insurance exchange.

For determining the number of FTEs, except as later defined, the total service hours for all employees (regardless of their participation in the health plan) are aggregated together and divided by 2,080. Service hours include those hours paid for services rendered as well as time off (i.e. vacation, sick, jury duty, etc.). The service hours of partners, sole proprietors, 2 percent or more shareholders of S Corporation, business owners with more than 5 percent ownership, and close family members of owners are excluded from the calculation.

To determine the number of service hours, as prescribed the IRS regulations, the employer can use one of the three methods: actual hours, days-worked equivalency and week-worked equivalency. Under a controlled group scenario, all employees are treated as a single employer in determining whether any member of the group is an eligible small employer.

The average annual wages is the total of all wages paid to employees (except those paid to owners and family members) divided by the number of FTEs. Wages are defined as those paid for the purposes of calculating the Federal Insurance Contribution Act (FICA) amount without the wage base limitation. Health insurance premium costs include those premiums to cover: medical, dental, vision, long term care, nursing home and home health. The employer is required to pay at least 50 percent of the premium in order for the premium to be eligible for the credit.

Different plans are not aggregated together to meet this qualifying arrangement. For example: an employer pays 50 percent of the medical plan and 40 percent of the dental plan premiums. Only the medical plan premiums are included for purposes of calculating the credit.

For 2010, premiums paid prior to the enactment of the Health Care Reform Act are included in the calculation of the credit. For non-tax exempt organizations, the credit is a general business credit, which an employer can use to offset federal income tax. In the future, any unused credit can be carried back one year and forward 20 years.

For 2010, the credit can only be carried forward. The amount of the health insurance premium deducted as a business expense is reduced by the amount of the credit. For tax- exempt organizations, the credit is considered a refundable credit; as a result the employer will receive a monetary refund.

Eligible employers should take advantage of the health insurance credit to reduce the burden of rising health insurance premiums.


Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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