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The following alert is from Desmond Sheridan.
Congressional Publication Explains New Health Insurance Tax Credit
In a new publication, the Congressional Research Service (CRS) simplifies some of the difficult aspects of calculating the Code Sec. 45R small employer health insurance credit created by the Patient Protection and Affordable Care Act ("PPACA"). The credit percentage that can be claimed varies with the number of employees and average wages. Taxpayers and their advisers who want an idea of the credit percentage available in a particular instance can use one of three tables in the study to get a quick read.
Background. For tax years beginning after Dec. 31, 2009, the PPACA provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. "Nonelective" means the employee is not required to reduce salary to receive the benefit. An eligible small employer (ESE) generally is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.
The credit is a general business credit, and can be carried back for one year and carried forward for 20 years. The credit is available for tax liability under the alternative minimum tax.
Year the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. This is generally health insurance coverage purchased from an insurance company licensed under State law.
For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a State exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.
Calculation of credit amount. The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage: (1) the amount of contributions the ESE made on behalf of the employees during the tax year for the qualifying health coverage and (2) the amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. To calculate the contributions under the second of these two amounts, the benchmark premium is multiplied by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer.
The applicable percentage is 35% for tax years beginning after 2009 and before 2014. It is 50% for tax years beginning after 2013.
The credit reduces the employer's tax deduction for health insurance premiums paid.
Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for purposes of this credit.
Credit phaseout. If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is phased out. Finding the credit percentage under the phaseout rules. In the following tables, the CRS summary of the new small business health insurance tax credit shows how the credit is phased out as the number of FTEs increases from 10 to 25 and as average compensation increases from $25,000 to $50,000. Note that the $25,000 and $50,000 figures will be indexed for inflation beginning in 2014; the report uses these figures throughout for simplicity's sake.
Table 1. Small Business Tax Credit as a Percent (Maximum of 35%) of Employer Contribution to Premiums, For-Profit Firms in 2010-2013 and Nonprofit Firms in 2014+
Average Wage
Firm size Up to $25,000 $30,000 $35,000 $40,000 $45,000 $50,000
Up to 10 35% 28% 21% 14% 7% 0%
11 33% 26% 19% 12% 5% 0%
12 30% 23% 16% 9% 2% 0%
13 28% 21% 14% 7% 0% 0%
14 26% 19% 12% 5% 0% 0%
15 23% 16% 9% 2% 0% 0%
16 21% 14% 7% 0% 0% 0%
17 19% 12% 5% 0% 0% 0% 18 16% 9% 2% 0% 0% 0%
19 14% 7% 0% 0% 0% 0% 20 12% 5% 0% 0% 0% 0%
21 9% 2% 0% 0% 0% 0% 22 7% 0% 0% 0% 0% 0%
23 5% 0% 0% 0% 0% 0%
24 2% 0% 0% 0% 0% 0%
25 0% 0% 0% 0% 0% 0%
Table 2. Small Business Tax Credit as a Percent (Maximum of 50%) of Employer Contribution to Premiums, For-Profit Firms in 2014+
Average Wage
Firm size Up to $25,000 $30,000 $35,000 $40,000 $45,000 $50,000
Up to 10 50% 40% 30% 20% 10% 0%
11 47% 37% 27% 17% 7% 0%
12 43% 33% 23% 13% 3% 0%
13 40% 30% 20% 10% 0% 0%
14 37% 27% 17% 7% 0% 0%
15 33% 23% 13% 3% 0% 0% 16 30% 20% 10% 0% 0% 0%
17 27% 17% 7% 0% 0% 0% 18 23% 13% 3% 0% 0% 0%
19 20% 10% 0% 0% 0% 0% 20 17% 7% 0% 0% 0% 0%
21 13% 3% 0% 0% 0% 0% 22 10% 0% 0% 0% 0% 0%
23 7% 0% 0% 0% 0% 0% 24 3% 0% 0% 0% 0% 0%
25 0% 0% 0% 0% 0% 0%
The charts make it clear that there's no credit if the average wage is $50,000.
The tables, which use rounded percentages, are a valuable way to get a quick read on the amount of credit percentage available in a particular instance. However, note that IRS has yet to say whether it will employ similar tables in administering the credit. |
