On May 17, 2010, the IRS released Notice 2010-44, which provides comprehensive guidance to small businesses that are eligible for a new health care tax credit under the recently passed health care reform legislation.
The Patient Protection and Affordable Care Act (PL 111-148) enacted new I.R.C. § 45R, effective for taxable years beginning in 2010 through 2013, which allows certain employers to claim a tax credit if they offer health insurance to their employees. Small businesses are eligible for credits of up to 35% of non-elective contributions the businesses make on behalf of their employees for insurance premiums. Tax-exempt organizations get a 25% credit against payroll taxes. The credit is not reduced by the value of available state healthcare credits.
After 2013, the maximum credit increases to 50% (and 35% for tax-exempt organizations) for two additional years. At that point, small employers will be expected to transition employees to the exchanges, Treasury Assistant Secretary for Tax Policy Michael Mundaca told reporters.
To be a qualifying small business, an employer must have fewer than 25 full-time equivalent employees (“FTE”) for a tax year; the average annual wages must be less than $50,000 per FTE and the employer must maintain a “qualifying arrangement” as defined in the Notice.
The Notice outlines the following steps to determine whether an employer is eligible for a credit:
1. Determine the employees who are taken into account for purposes of the credit.
Family members, dependents, sole proprietors, partners in a partnership, shareholders owning more than two percent of an S corporation, and any owners of more than five percent of other businesses are not taken into account as employees for purposes of the credit. Seasonal workers are disregarded unless they work more than 120 days during the taxable year. All other employees will be taken into account.
2. Determine the number of hours of service performed by those employees.
The Notice provides three methods for calculating the number of hours of service performed: (1) actual hours of service; (2) a “days-worked equivalency;” or (3) a “weeks-worked equivalency.”
3. Calculate the number of the employer’s FTEs.
The number of an employer’s FTEs is determined by dividing the total hours of service performed by employees (but not more than 2,080 hours for any employee) by 2,080. The effect is to extend the credit to employers with more than 25 employees, some of whom work part-time or are otherwise disregarded.
4. Determine the average annual wages paid per FTE.
The average annual wages paid per FTE is computed by dividing (1) the total wages paid to employees by (2) the number of the employer’s FTEs for the year.
5. Determine the premiums paid by the employer under a qualifying arrangement for health insurance that meets the requirements of section 45R.
Only premiums paid by the employer for health insurance coverage under a qualifying arrangement are counted in calculating the credit. A “qualifying arrangement” is one in which the employer pays premiums for each employee of at least 50% of the premium cost of the coverage. This includes limited scope programs such as dental and eye care, subject to the same 50% employer contribution requirement. Stand-alone plans must meet the requirement independently.
Eligible employers may claim the credit on their annual income tax returns, as part of the general business credit, and an unused credit amount may be carried back one year or forward twenty years. For 2010, tax years unused credit amounts can only be carried forward. The credit can be reflected in estimated tax payments and can offset an employer’s alternative minimum tax liability for the year.
The Treasury Department plans to issue future guidance on additional issues, such as the application of the uniformity requirement and the 50% requirement for taxable years after 2010.