Credit for Small Employer Health Insurance

Credit for Small Employer Health Insurance Premiums

For owners of small businesses and their workers, last year’s health reform legislation had some key provisions to pay attention to. This letter (and attachments) addresses the tax credit for small employer health insurance premiums.

New Law:

The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.

Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law.

Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s non-elective contributions toward the employees’ health insurance premiums. The credit phases out as firm- size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums.

Self-employed individuals, including partners and sale proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorship from receiving the credit for the owner and their family members.

Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full- time equivalent wages.

Action Required:

The rest of this document goes through the basic questions discussed above to see if you might be eligible for the credit. If you do qualify, then complete the two worksheets. This will enable us to compute the credit and include it in your tax return.

Credit for Small Employer Health Insurance Premiums 
Do you have employees? If NO, STOP.
Do you provide health insurance coverage to your employees? If NO, STOP.
If so, do you pay 50% or more of the premium cost? If NO, STOP.
If YES for the above questions, then:
Do you have less than 25 “FTEs”? If YES, Continue
Is their average annual wage less than $50,000? If YES, Continue

THEN:

Complete the two attached worksheets so we can compute
the tax credit

FTE means Full Time Equivalent Employees generally computed as:

Hours Worked during 2010/ 2080 = FTE