New Small Business Health Care Credit for 2010

by Amanda Cardinali

On March 23rd, 2010 the Patient Protection and Affordable Care Act was signed into law by President Barack Obama as part of the health care reform legislation. This act provides small businesses, as well as tax-exempt employers, a credit as incentive to provide health insurance coverage for the first time or maintain existing coverage they already have.

Eligibility Requirements

Overall, any small employer that pays at least half the cost of single health care coverage for their employees is able to claim the credit. However, there are some specific eligibility rules that must be met in order for a business to qualify. The major eligibility requirements are as follows:

• Health Care Coverage Provided - Qualifying employers must cover 50 percent or more of health care cost, based on the single rate, for some of their employees.
• Firm Size - Qualifying employers must have fewer than 25 full time workers. However, since the eligibility is based on full-time equivalents (FTE), not employees, an employer may be eligible even if they employ more than 25 individuals. For example, an employer with less than 50 part time employees may qualify.
• Average Annual Wage - An employer must pay wages of $50,000 or less, on average, per FTE worker per year to qualify.

Amount of Credit

For tax years beginning in 2010 through 2013, small business employers, who meet all eligibility requirements, will be able to claim a maximum of 35 percent of the premiums paid on behalf of their employees. Eligible tax-exempt organizations will receive a maximum credit of 25 percent of premiums paid. In 2014, the maximum credit will increase to 50 percent for small business, and 35 percent for tax-exempt employers, if the eligible employer purchases coverage through the Insurance Exchange.

There is a gradual phase-out of the credit for firms with average wages between $25,000 and $50,000 and for firms with between 10 and 25 FTE workers. The maximum credit is granted to employers with 10 or less FTE workers, paying annual average FTE wages of less than $25,000.

The credit for small businesses can be claimed as a general business credit on the employer's 2010 income tax return. The IRS will provide additional information for tax-exempt employers on how to claim the credit.

Notification from the IRS

As of April 19th, the IRS started distributing postcards to alert small business owners, who may qualify, of the new tax credit. However, even if you do not receive a postcard from the IRS you still may qualify for the credit and are encouraged to check the IRS website for eligibility.