The Patient Protection and Affordable Care Act instituted a new income tax credit for small businesses that provide health care coverage for their employees. Small businesses are those who employ 25 or fewer full time employees with average annual wages of less than $50,000. The employer must pay at least 50% of the premium cost of the health care coverage for its employees. The credit is effective for tax years beginning after December 31, 2009.
The credit is calculated as a percentage (generally 35% through 2013) of the nonelective employer contributions made toward the employees’ health insurance premiums. The contribution base is capped at the amount of “the average premium for the small group market in the State” in which the employer offers the health coverage. This average premium is determined annually by the Secretary of Health and Human Services.
The IRS recently published these HHS determined premium rates in Revenue Ruling 2010-13.
With this new information, you are now able to more accurately project the impact of the credit on your business. For some, it enables you to consider the cost benefit of increasing your contributions toward your employees’ coverage in order to meet the required threshold. Remember to consider the potential effect of the HIRE Act on your employee headcount and therefore your eligibility as a small business for this credit.