One benefit of health care reform is a tax credit available to certain small employers offering health insurance to employees. The tax credit is effective for this year for employers with 25 or fewer full-time employees. The IRS recently issued Notice 2010-44, which, along with Revenue Ruling 2010-13, and a frequently asked questions page on its web site, provides guidance to small employers regarding the credit. Small employers should review this guidance and determine if they are eligible for the tax credit.

Eligible Small Employers

Notice 2010-44 sets out 4 criteria that a small employer must meet to be eligible for at least a portion of the tax credit.

  • The employer must be a taxable employer or a 501(c) tax-exempt employer (such as a small tax-exempt nonprofit organization).
  • The employer must have fewer than 25 full-time equivalent employees (“FTEs”). For the purposes of determining the number of FTEs for this credit, an equivalency is used for counting part-time employees. For example, an employee who only works 20 hours per week would be half of one full­time employee, or half of one FTE, so two employees who each work 20 hours per week add up to only one FTE. Additionally, certain categories of employees, such as seasonal workers, business owners and their family members, may be excluded when counting FTEs.
  • The average annual wages for the employees must be less than $50,000.
  • The employer provides health insurance and pays at least 50% of the cost of the health insurance coverage.

Note: The full credit is available to small employers that have 10 or fewer FTEs and that pay average annual compensation of $25,000 or less per FTE.

Credit Amount

For 2010 through 2013, the maximum tax credit available is 35% of the employer-paid portion of the premiums for the health insurance coverage (the maximum for tax-exempt employers is 25%). In 2014, the amount of the credit will increase to 50% of the portion of employer-paid premiums (the maximum for tax-exempt employers will increase to 35%).

Eligible employers should be aware that they can claim this credit each year between now and 2013. Starting as of 2014, the tax credit is only available to an employer for two consecutive tax years. Thus, the tax credit is potentially available for a total of six years — the four years for the period of 2010 through 2013 and a two-year period after 2013.

IRS Guidance

Information about the small employer tax credit is available at the IRS web site. The frequently asked questions on the tax credit are available here.

Notice 2010-44 is available here. Notice 2010-44 details several technical aspects of the eligibility requirements for the credit, including guidance on how to calculate average annual compensation.

Revenue Ruling 2010-13 is available here. Revenue Ruling 2010-13 provides guidance on average premiums that assists in calculating the amount of the tax credit.

Conclusion

Small employers should act quickly to determine if they are currently eligible and how they can take maximum advantage of this credit. Even those employers who doubt that they meet the qualifications should review the eligibility standards closely, as numerous categories of employees and compensation may be excluded when determining eligibility.