The new health reform law, the Patient Protection and Affordable Care Act (PPACA), was passed by Congress and was signed by President Obama on March 23, 2010.

One of the provisions of the new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees. Below is an abbreviated summary of this provision’s highlights.

Effective Dates for Tax Credit

• This provision will become effective beginning in the 2010 tax year.
• An enhanced version of the credit will be effective beginning in 2014.
• An employer must offer health care coverage to qualify for the tax credit. The rules change over the next several years. To qualify, an employer must cover:
  • Phase I: 2010 – 2013. To qualify for the tax credit in Phase I, an employer must cover at least 50% of the cost of single health care coverage for workers receiving coverage.
  • Phase II: Beginning 2014. To qualify for the tax credit in Phase II, an employer must cover at least 50% of the cost of single health care coverage for workers receiving coverage only if the coverage is purchased through an exchange. The Phase II tax credit is only available for 2 years.
  • The amount of an employer’s premium payments that count toward the credit is capped by the average premium for the small group market in the state (or an area within the state) in which the employer offers coverage. This average is determined by the Department of Health and Human Services (HHS).
  • A qualifying employer must have 24 or fewer FTE workers
  • A qualifying employer must pay average annual wages of less than $50,000. Business owners, their family members and most seasonal employees are not counted.
  • The amount of average annual wages is determined by:
    • First dividing the total wages paid by the employer during the employer’s tax year to eligible employees by the number of the employer’s FTEs for the year
    • The result is then rounded down to the nearest $1,000. Wages for this purpose means wages as defined for FICA purposes

Employer Eligibility Rules

Eligibility

First, determine the total number of your groups' employees (not counting owners or family members). Part-time hours are the total annual hours of part-time employees. Full-time employees are those who work at least 40 hours per week.

Next, calculate the average annual wages of employees (not counting owners or family members).

If the average wages are less than $50,000 and your clients pay at least half of the insurance premiums for their employees at the single (employee-only) coverage rate, then they may be eligible for the credit.

Amount of Credit

• 2010 - The credit is worth up to 35% (25% for tax-exempt employers) of a small business’ health premium costs in 2010.
• 2014 - The rate increases to 50% (35% for tax-exempt employers) for tax year 2014, but is available only if health coverage is purchased through an exchange.
• 2016 – The tax credit expires
• The credit amount downgrades from 35% for businesses with average wages between $25,000 and $50,000 and for businesses with between 10 and 25 FTE workers.

The information provided is intended only to be an overview of the major provisions of the small business tax-credit included in the PPACA. Please consult with your tax advisor for further details on how this regulation applies to your business. Additional guidance on the credit is available in IRS Notice 2010-44 at http://www.irs.gov/irb/2010-22_IRB/ar12.html.

FOR MORE INFORMATION, CONTACT:
Lundy Insurance Services
(858) 408-1404
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Information for this article was obtained from IRS Notice 2010-44; Summary of Small Business Health Insurance Tax Credit Under PPACA (P.L. 111-148), Chris Peterson and Hinda Chaikind, Congressional Research Service, 7-5700, R41158