The recently passed Health Care Reform Act included a “Credit for Small Business Employee Health Coverage Expenses.” This credit falls under one of the subtitles in the Act that will go into effect immediately. For tax years beginning in 2010, eligible small businesses may be able to claim an income tax credit for expenditures for qualifying health care coverage for their employees.
An eligible small business is (1) an employer who employs fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement.” A qualifying arrangement includes plans whereby the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.
In addition, 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. The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services and published by the IRS. Publication of the average premium for the small group market on a state-by-state basis is expected to be posted on the IRS website by the end of April.
You can read more on the IRS website where they have posted a FAQ list.
The first two questions address eligibility, questions #3 – 8 address calculation of the credit, #9 – 15 explain how to determine FTE’s and average annual wages for eligibility purposes, #16 – #21 tell how to claim the credit. Be sure to read the last question (#22) on the transition rules for 2010.