Health Law Attorney BlogNew IRS Tax Credit Benefits Small Employers
In Notice 2010-44, the Internal Revenue Service (IRS) outlined the tax credit for employee health insurance expenses available to certain small businesses under Section 45R of the Internal Revenue Code. Effective for taxable years beginning in 2010, the 45R credit is available to an employer when (1) the employer has fewer than twenty-five full-time equivalent employees (FTEs) for the taxable year, (2) the average employee wage for the year is less than $50,000 per FTE, and (3) the employer maintains a “qualifying arrangement” as defined in the Notice.
The notice explains that eligibility requires (1) identifying which people are employees for the purposes of the section, (2) calculating total hours of service for each employee, (3) determining the total number of FTEs, (4) calculating the average annual wages paid per FTE, and finally (5) determine the premiums paid that are taken into account for 45R purposes.
The first step involves determining which people count as “employees.” For the purposes of section 45R, partners in a business and some types of owners do not count as “employees,” and neither do the family members and dependents of these partners and owners. Further, Section 45R does not take seasonal employees into account as employees unless they work on more than 120 days during the taxable year.
The next step is to calculate total hours of service for each employee. These hours include not only work, but also holidays and periods of illness, incapacity or disability, layoff, jury duty, military duty, and leaves of absence. The employer may calculate hours by any of three methods: (1) the actual total number of hours for which payment is made or due, (2) a days-worked equivalency, which counts each workday as eight hours, or (3) a weeks-worked equivalency, which counts each workweek as forty hours. The employer then totals all employees’ hours of service (not exceeding 2,080 hours for any single employee) and divides the total number of hours by 2,080 in order to determine the number of FTEs. This calculation permits some employers with 25 or more employees to qualify for the 45R credit, by counting two half-time employees (paid or owed wages for 1,040 hours each) as a single full-time employee, for example. Then, the total amount of wages paid to employees is divided by the number of FTEs in order to determine average annual wages for the year.
Finally, the employer must pay premiums under a “qualifying arrangement,” which is an arrangement under which the employer pays a certain uniform percentage of premiums (not less than fifty percent) for each employee enrolled in health insurance coverage offered by the employer. Limited-scope coverage, such as vision or dental plans, may also qualify.
The maximum credit is 35% of an eligible employer’s premium payments. The amount phases out if the number of FTEs is greater than 10 or if average annual wages exceed $25,000. The amount of the credit is further adjusted if the employee receives a state credit or subsidy for health insurance.
The IRS also outlines transition relief for taxable years beginning in 2010. “[A]n employer that pays an amount equal to at least 50 percent of the premium for single (employee-only) coverage for each employee enrolled in coverage offered to employees by the employer will be deemed to satisfy the uniformity requirement for a qualifying arrangement, even if the employer does not pay the same percentage of the premium for each such employee.”
The 45R credit is claimed on the employer’s annual income tax return.
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