1. What is the New Credit for Health Insurance Expenses?

Under the new Health Care Reform Law, certain small employers that provide health insurance can receive a Tax Credit beginning in 2010.

2 .Who Qualifies for the Credit?

The employer must satisfy the following conditions:

  • Fewer than twenty-five (25) full-time employees;
  • Average wages less than $50,000;
  • The employer must pay a certain percentage of the employee’s health insurance premium as described in question three (3) below.

3. How much Premium does the Employer have to pay for an Employee?

The employer must pay at least 50% of the employee’s premium, and the percentage of the premium must be the same for all employees. (However for 2010, the percentage of premium paid for employees can be different for each employee. See question six (6) below.)

4. How much is the Credit?

This is rather complicated, but generally the credit can be a maximum of 35% of premiums paid for 2010. (The credit increases to 50% in 2014.)

An employer who has ten (10) or fewer employees and whose average salary is $25,000 or less will receive the entire credit. The credit phases out as the average wages and the number of employees increase. Once the employer has twenty-five (25) full-time employees or the average salaries of the employees is $50,000 or more, the credit is zero (0). However, note that you can have more than twenty-five (25) employees if some are less than full-time.

Also, the amount of the credit is reduced to the extent that the premiums exceed the small group market rate for Ohio. That will be determined by the Department of Health and Human Services and published by the IRS sometime towards the end of April 2010.

5. Will Salary to the Owner and Family Members Impact the Ability to Qualify for the Credit?

No, this will make it easier to qualify for the credit. The fact that the business owner and/ or family members make a higher salary is ignored for purposes of satisfying the salary and full-time employee limits. A business owner is a partner, member, sole proprietor and a 2% Shareholder in a S-Corporation or a 5% owner of a C-Corporation. A family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a stepparent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law. The premiums paid for health insurance of an owner and relative are not eligible for the credit.

6. What if we already have provided some Benefits before the Law was passed?

Any premiums paid in 2010, even before the law was passed, will be counted in trying to satisfy the rules. More importantly for 2010, the IRS will issue transition relief. Two important modifications will apply for 2010.

  • The employer does not have to provide a uniform percentage for each employee as long as the employee satisfies the 50% test. This may allow the employer to catch up and hit the 50% requirement by increasing premium payments for certain employees before the end of the year.
  • For 2010, the 50% requirement is based upon single coverage premium rates, even if the employee receives family coverage.

7. Where do I find more information on the New Credit?

Initially, the IRS has issued a news release and some additional questions and answers that can be helpful pending more guidance. This information can be found at: http://www.irs.gov/newsroom/article/0,,id=220848,00.html.