IRS Publishes FAQs on Small Business Health Care Credit

By Alistair M. Nevius, J.D.

From the IRS

On April 1, the IRS published on its website 22 questions and answers about the new small business health care tax credit (www.irs.gov/newsroom/article/0,,id=220839,00.html). The FAQs cover:

  • Eligibility for the credit;
  • Calculation of the credit;
  • Determining full-time employees and wages for purposes of the credit;
  • How to claim the credit; and
  • Transition relief for 2010.

The small business health care credit was created by the Patient Protection and Affordable Care Act, P.L. 111-148. Small businesses—defined as businesses with 25 or fewer employees and average annual wages of less than $50,000—are eligible for a credit of up to 50% of nonelective contributions the business makes on behalf of its employees for insurance premiums (new Sec. 45R). Tax-exempt organizations would get a 35% credit against payroll taxes.

This credit is available for tax years beginning after December 31, 2009, and is phased in during 2010–2013. During those years, the maximum credit is 35% of the employer’s eligible premium expense (25% for tax-exempt employers).

Employers with 10 or fewer employees and average wages of less than $25,000 will get 100% of the credit; for other eligible employers, the credit will be reduced based on the number of employees over 10 and the excess of the employees’ average wages over $25,000. The $25,000 average annual wages figure will be indexed for inflation after 2013.

The FAQs say that only premiums paid by the employer under a qualifying arrangement are counted in calculating the credit. To have a qualifying arrangement, the employer must pay premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage of the premium cost of the coverage. That uniform percentage must be not less than 50% of the premium cost. The amount of premiums counted in calculating the credit is only the portion paid by the employer.

The amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the state (or an area within the state) in which the employer offers coverage were substituted for the actual premium.

Transition Relief

For 2010, the IRS says it intends to add the following transition relief to the requirements for a qualifying arrangement:

  1. If an employer pays at least 50% of the premium for each employee enrolled in coverage offered to employees by the employer and otherwise satisfies the requirements for the credit, it will qualify for the credit even though the percentage of the premium it pays is not uniform for all such employees.
  2. The requirement that the employer pay at least 50% of the premium for an employee applies to the premium for single (employee-only) coverage for the employee. Therefore, if the employee is receiving single coverage, the employer satisfies the 50% requirement with respect to the employee if it pays at least 50% of the premium for that coverage. If the employee is receiving coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer satisfies the 50% requirement with respect to the employee if the employer pays an amount of the premium for such coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the coverage the employee is actually receiving).
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