The feds just announced several important clarifications about the small business health care tax credit that may affect your company’s eligibility.
New IRS guidance, Notice 2010-44, makes it easier for small businesses to determine:
- whether they’re eligible for the new health care tax credit under the Affordable Care Act, and
- what size credit they’ll receive.
Smaller employers will get the maximum credit – but only if they have 10 or fewer FTE employees and pay annual average wages of $25,000 or less. The credit phases out completely for employers with 25 FTEs or more paying average wages of $50,000 per year or more.
Looking at the details
A White House announcement summarizing the notice explains, in detail, that:
Dental, vision qualify. Small businesses can receive the credit not only for traditional health insurance, but also for add-on dental, vision and other limited-scope coverage. The employer must meet the requirements for limited-scope coverage that are similar to those that apply for single coverage: The employer must agree to pay at least 50% of the premium.
You have flexibility determining hours worked. Because the tax credit’s matching rate is highest for employers with 10 or fewer full-time equivalent (FTE) employees, the number of hours worked is crucial. The new guidance allows employers to choose among three different methods of determining hours to minimize their bookkeeping duties while receiving the maximum credit for which they qualify. Employers can look at:
- actual hours of service
- an estimate of hours based on total days of service, or
- an estimate based on total weeks of service.
State help doesn’t reduce federal credits. The new tax credit won’t be reduced by a state health care tax credit or subsidy, except in limited circumstances to prevent abuse. An employer that receives a state tax creditor subsidy will also receive the full federal credit based on its entire contribution, as long as the federal credit doesn’t exceed the employer’s net contribution. About 20 states offer these benefits, according to the National Conference of State Legislatures.
The IRS notices gives more than a dozen examples to help employers decide if they qualify for the credit. Generally, small businesses that pay at least half the cost of single coverage qualify. The maximum credit from 2010 to 2013 will be:
- 35% of premiums paid for eligible small business employers, and
- 25% of premiums paid by tax-exempt organization employers.
