New Health Care Tax Credit Can Offer Significant Savings for Small Businesses

March 23, 2011

By HunterMaclean Attorneys

Published in Business in Savannah

Health care reform legislation signed by President Obama in March of 2010 includes a new Small Business Health Care Tax Credit to help small businesses cover the cost of providing health care insurance for employees.

Nearly 17 million Americans currently work for businesses that will be eligible for the tax credit between now and 2013, according to a recent report from the Commonwealth Fund, a private health care research group. This credit has been designed to help reduce financial pressure on small businesses that want to provide health insurance coverage for employees.

Both non-profit and for profit companies can qualify for this tax credit. Local businesses meeting certain criteria can now take advantage of the new small business health care tax credit, which helps offset the cost of providing health insurance to employees.

In order to qualify for the new health care tax credit, a business must meet all of the following criteria:
Providing health care coverage. The employer must pay at least 50 percent of the cost of health care coverage for some of its workers based on the single rate. An employee’s pre-tax deductions used to pay for health care premiums do not count as employer paid premiums to determine the employer’s contribution. The employer’s contribution eligible for the credit is limited to the average cost of health insurance for an employee in each state.
No more than 25-full-time employees. The employer must have no more than the equivalent of 25 full-time workers. Generally, the business owner and his family members who work for the business are not counted when determining the number of full-time equivalent employees. Also, seasonal workers’ hours are not counted unless the worker works for more than 120 days during the year. An employer with fewer than 50 half-time workers, therefore, may be eligible. Because the tax credit’s matching rate is highest for employers with 10 or fewer full-time equivalent employees, the number of hours worked is an important factor in calculating the credit. The new guidance allows employers to choose among three different methods of determining hours to minimize their bookkeeping duties while receiving the maximum tax credit for which they are eligible.
Average annual wage less than $50,000. The employer must pay average annual wages below $50,000.
The maximum credit is worth up to 35 percent of a small business’ health insurance premium costs in 2010 or 25 percent for tax-exempt employers. Employer paid premiums for the business owner and his family members who work for the business cannot count toward the credit. On January 1, 2014, this rate will increase to 50 percent for small businesses and 35 percent for tax-exempt employers, but only for premiums paid for coverage purchased through the healthcare exchanges initiated under last year’s healthcare reform law. The increased credit may only be used for two years.
To claim this tax credit, for-profit small businesses use IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Small businesses will include the amount of the credit as part of the general business credit on their income tax returns. The credit is only available to offset tax liability, but can be carried back or forward in the same manner as other general business tax credits. The credit is neither refundable nor payable in advance.
Tax-exempt organizations will determine the amount of the credit on IRS Form 8941, but include the amount of the credit on Line 44f of revised Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T has been revised for the 2011 filing season to enable eligible tax-exempt organizations –– even those that owe no tax on unrelated business income –– to claim the small business health care tax credit. Unlike for-profit businesses, for tax-exempt organizations the tax credit is a refundable tax credit limited to the employer’s payroll taxes.
For tax years beginning in 2010 through 2013, employer premiums paid for benefits consisting of medical care under any hospital or medical service policy, hospital or medical service plan contract, or health maintenance organization (HMO) contract offered by a health insurance issuer will be eligible for the credit. The tax credit is not only available for traditional health insurance premiums paid by the employer, but also for stand-alone dental, vision, and other limited-scope coverage. Employer contributions to self-insured health coverage are not eligible premiums for the small business health care tax credit.
This credit has been designed to alleviate the financial burden for qualifying companies and to encourage these businesses to retain current health insurance policies, or implement new health care plans and increase employer contribution to such plans. The White House Council of Economic Advisors estimates that 4 million small businesses would qualify for the credit if they insure their workers. But the financial incentive is only temporary and any long-term increase of small-business employer provided health-care coverage is uncertain.
Remember that when it comes to corporate tax issues, it is always wise to seek professional counsel. To determine whether your company qualifies for the new health care tax credit – and the maximum amount you can claim – please consult with an employee benefits or corporate tax expert.

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