Small employers may qualify for a new health care tax credit under the Patient Protection Act beginning in tax year 2010. The eligibility rules are relaxed during the initial transition phase during tax years 2010 to 2013 (the "Transition Phase"). The Transition Phase ends on January 1, 2014, at which time the maximum credit amount will increase and the eligibility criteria will become more restrictive. Small employers should determine whether they are eligible for this credit and should contact counsel with any questions. The basic requirements and benefits are summarized below:
Transition Phase: Tax years 2010 to 2013.
Eligible Small Employers: Small employers (including tax-exempt entities) will be eligible for the credit if all of the following criteria are met:
The employer has less than 25 Full-Time Employees or Full-Time Equivalents (collectively referred to as "FTEs").
The average annual FTE compensation must be less than $50,000.
The employer maintains a "Qualifying HealthCare Arrangement" whereby the employer makes non-elective contributions of at least 50% of the cost of health care insurance premiums that cover participating FTEs.
Credit Amount: Eligible small employers may claim a maximum credit of 35% (25% maximum for tax-exempt small employers). However, the maximum credit amounts are only available for eligible small employers with 10 or fewer FTEs with an average annual compensation of $25,000 or less.
Phase Out: The maximum credit amount will be reduced by 6.667% for each FTE in excess of 10 and by 4% for each $1,000 above $25,000 in average annual compensation. The credit will expire when an employer has 25 or more FTEs or pays $50,000 or more in average annual compensation.
Changes in Tax Years Beginning After 2013: Beginning on January 1, 2014 the credit and the eligibility requirements will change. Some noteworthy changes are as follows:
The maximum available tax credit will increase from 35% to 50% (25% to 35% for tax-exempt small employers).
- Eligible Small Employers will be required to participate in an insurance exchange in order to claim the credit, subject to other modifications and restrictions.
- Eligible Small Employers will only be able to claim the increased credit amount for two additional calendar years (e.g., 2014 and 2015 for calendar year employers).