The IRS has issued a notice explaining provisions in the recently enacted health care reform legislation that establish a federal income tax credit for small employers who implement or maintain health insurance coverage for employees. The notice clarifies various aspects of the new rules, including the following:

To qualify for the full tax credit, an employer must employ no more than 10 full-time equivalent employees with average wages of no more than $25,000. The credit decreases as the number and wages of employees get larger. It phases out entirely, for example, for employers with 25 or more employees or where the average wage is at least $50,000.

  • To qualify, an employer must maintain health insurance coverage and contribute a uniform percentage of its premium cost. The contributions must equal at least 50 percent of the premium. A transitional rule offers some relief with regard to uniformity for 2010.
  • Certain business owners may be excluded from the tests to determine whether an employer qualifies for the tax credit and, if so, how much the tax credit will be.
  • A taxable employer may earn an annual federal income tax credit of up to 35 percent of its health insurance premiums. A tax-exempt employer may earn a refundable tax credit of up to 25 percent of those premiums. Various other limitations may apply to the amount of the tax credit. Further guidance will inform tax-exempt employers how to claim the credit. The tax credit reduces the amount of premiums for which a deduction may be taken, reducing the value of the credit for taxable employers.
  • The tax credit is effective for 2010 and continues through 2013.

We can assist small employers in evaluating whether they are in a position to claim the tax credit, whether it would be worthwhile to do so, and whether they should be taking additional measures at this time to take the most advantage of the credit.

As the federal health care reform effort gained steam, Ballard Spahr attorneys formed an initiative to monitor and analyze legislative developments. With federal health care reform now a reality, our attorneys are assisting employers in understanding the relevant changes and planning for the future. For more information on the firm’s Health Care Reform Initiative, please click here.