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Health Care Reform Small Business Tax Credit: How to Qualify

Editor’s Note: The Small Business Tax Credit applies to eligible small businesses that provide health insurance for their employees as of the 2010 filing year and beyond.  Below is a bullet point list giving the highlights related to the Small Business Tax Credit.  For further information, please do not hesitate to call me at 774-264-8576, Lisa Aldrich, CPA

  1. This new tax credit excludes “family employees,” according to the IRS. For the purpose of this tax credit, a family member is defined as a child; a descendant of a child; a sibling; a step-sibling; a parent; an ancestor of a parent; a step-parent; 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.
  2. The IRS Massachusetts Benchmark annual premiums:
    • Single (or employee-only) Benchmark premium: $5,700
    • Family Benchmark premium: $14,138
  3. Small businesses with 10 employees or less may qualify for the full 35% premium tax credit. (Owner and “family employees” excluded).
    • Employers must cover 50% of their state’s Benchmark for single or family premiums or 50% of the actual cost of their employees’ health insurance premiums.
    • The small business’ employees’ average annual wages cannot exceed $25,000.
  4. Small businesses with 11 to 25 employees may qualify for a reduced credit.
    • Employers must cover 50% of their state’s Benchmark for single or family premiums or 50% of the actual cost of their employees’ health insurance premiums.
    • The small business’ employees’ average annual wages must be less than $50,000.
  5. The IRS uses the number of full-time equivalents (FTEs) at the business to calculate the tax credit. (A company with a mix of 30 full-time and part-time employees may be eligible for the tax credit).
    • 1 FTE = 40 hours per week x 52 weeks per year = 2080 hours per year.
    • 2 part-time employees (2 x 20 hours per week) = 1 FTE = 40 hours per week x 52 weeks = 2080 hours per year.
  6. The IRS-defined Benchmark premiums vary by state and can affect the way the tax credit is calculated if the premiums of the business’ employees are above the state’s Benchmarks. These are the Benchmark premiums for Massachusetts:
    • IRS-defined annual MA single (or employee-only) Benchmark premium: $5,700
    • IRS-defined annual MA family Benchmark premium: $14,138
  7. The maximum health care contribution an employer may use to calculate the tax credit cannot exceed the state’s Benchmark premiums for the small group market. (Ex: A Massachusetts employer annually covers 100% of the $6,000 employee-only premium and 100% of the $15,000 family coverage premium. In this case, the employer cannot include in the tax credit calculation a dollar amount above the Massachusetts Benchmark premiums of $5,700 for single employees and $14,138 for families.)

First Published in The SBSB Bulletin, July 2010, Vol.32, No.3

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