Small Employer Tax Credit

On Monday, May 17, 2010, the IRS released new guidance on the small-employer healthcare tax credit provided under the Patient Protection and Affordable Care Act (“PPACA”), including detailed guidance on eligibility and transition criteria. Key items in the guidance include:

  • Eligibility:  The IRS notice includes detailed guidelines on how a small business can determine whether it is eligible for the healthcare tax credit and how large a credit it will receive.  The credit is generally available to employers that have fewer than 25 full-time equivalent (“FTE”) employees paying wages averaging less than $50,000 per employee per year.  The new credits will likely provide assistance to an estimated 4 million small firms that provide health coverage to their workers.
  • No Reduction Due to State Credits:  The guidance clarifies the new tax credit will not be reduced by a state healthcare tax credit or subsidy.  Therefore, an employer that receives a state tax credit or subsidy will also receive the full federal credit based on its entire contribution – as long as the federal credit does not exceed the employer’s net contribution.
  • Dental and Vision Coverage Qualify:  The guidance clarifies that small businesses can receive the credit not only for traditional health insurance coverage but also for add-on dental, vision and other limited-scope coverage.
  • Method for Determining Hours Worked:  The new guidance allows employers to choose among three different methods of determining the number of hours worked.  Employers can choose the most favorable method of determining hours worked in order to receive the maximum tax credit for which they are eligible.
  • Transition Relief for 2010 Formalized:  Because the tax credit is effective for 2010 – but was not enacted until March 23, 2010 – some small businesses that are providing health insurance in 2010 may not meet all the requirements for a qualifying health insurance offer.  Beginning in 2010, the Administration is easing the requirement that employers pay a uniform percentage (not less than 50 percent) of the premium for each employee enrolled in health insurance coverage.  Specifically, qualifying employers must only contribute 50 percent of the premium for single coverage (even if the employee elects family coverage).

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