The Patient Protection Act, as amended by the Health Care and Education Reconciliation Act, provides a sliding-scale small employer tax credit to help offset the cost of employer-provided health insurance coverage. Generally, a small employer is one with fewer than 25 full time equivalent (FTE) employees and average annual wages per employee of less than $50,000. The credit is phased out between 10 and 25 employees and average annual wages per employee between $25,000 and $50,000.
FTE employees are determined by dividing the total hours worked by all employees (up to 2,080 per employee) by 2,080. Hours worked by seasonal workers are counted only if they work more than 120 days during the tax year. Average annual wages per employee are computed by dividing total wages paid by the number of FTE employees.
A small employer must pay at least 50% of the premium cost on a uniform basis for all of its employees who enroll in the plan. Self-employed individuals, greater than 2% S Corporation shareholders, and greater than 5% owners including family members are not treated as employees for determining the credit and their health insurance benefits do not qualify for the tax credit.
In 2010 through 2013, eligible employers may qualify for a tax credit for up to 35 percent of their contribution toward the employee’s health insurance premium purchased through a qualified insurance company. In 2014 and beyond, eligible employers who purchase coverage through a state exchange may qualify for a credit for two years of up to 50 percent of their contribution. The credit reduces the amount of the health insurance deduction. Qualified tax-exempt employers would be eligible for a reduced credit.
Employers with 10 or fewer FTE employees and average annual wages of less than $25,000 would be eligible for the full credit. Below is an example of a credit subject to partial phase-out.
Example – partial phase-out:
Assume an employer in 2010 has 12 FTE’s with average annual wages of $30,000. The employer paid $96,000 in health insurance and meets all other eligibility requirements outside of FTE and average employee wage requirements.
1. The maximum credit before phase-out would be: 35% x $96,000 = $33,600
2. Credit reduction due to FTE in excess of 10: ($33,600 x 2/15 = $4,480)
3. Credit reduction due to average annual wages in excess of $25,000: ($33,600 x 5,000/25,000 = $6,720)
4. Total credit reduction: ($4,480 + $6,720 = $11,200)
5. Total 2010 tax credit: ($33,600 – $11,200 = $22,400)
6. The employer health insurance deduction would be reduced: ($96,000 – $22,400 = $73,600)
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If you have any questions on how this tax credit will affect your business, contact us at 440-449-6800.