The recent health care reform law has created a new tax credit for certain employers who pay for their employees’ health care premiums. The tax credit, which is effective immediately, can cover up to 35% of the premiums a small business pays to cover its workers, says Clinton Baker, CPA and manager with Kennedy and Coe, an accounting and business consulting firm based in Kansas.
The tax credit is available to farm employers who provide health care and have fewer than 25 employees earning an average compensation of less than $50,000. The maximum credit for 2010 through 2013 is 35%; the credit increases to 50% for 2014 and 2015.
"The law allows for exclusion of owners and family members of owners from these calculations, and that helps bring the average compensation number down to something more realistic, making farmers more eligible for this tax credit," Baker says.
The Congressional Budget Office estimates that the health care tax credit will save small businesses $40 billion by 2019.
"These tax credits provide some immediate relief in making health insurance affordable for small businesses that provide coverage to their employees," says Jon Bailey, rural research and analysis director at the Center for Rural Affairs. Over time, he believes, as the features of health care reform legislation are implemented and take effect, rural small businesses and the rural self-employed will reap the benefit of pooling and larger group coverage that provides comprehensive, affordable and continuous health care coverage.
Eligibility. To be eligible for the tax credit, you must meet the following conditions, says Paul Neiffer, a CPA with Hansen NvO, based in Washington:
• You employ on average fewer than 25 full-time equivalent employees during the year. The way to calculate this is to take your total paid employee hours (excluding the excess of any hours for employees who work more than 2,080 hours in the year) and divide by 2,080 (the number of hours in a 52-week, 40-hours-per-week work year). If the number is less than 25, you qualify; if more than 25, you do not qualify, Neiffer says.
• The average wage paid to your employees is less than $50,000 per year.
• You pay health insurance premiums under a "qualifying arrangement," which means that you pay at least 50% of your employees’ health insurance premiums.
One last point to note, Neiffer adds, is that the amount of the premium that is eligible for the health care tax credit is derived from the actual premium paid by the employer. This amount is also subject to a cap based on what the employer’s premiums would have been for the small group market for his or her state (or states). In addition, if the employer pays 80% of the insurance premium, the cap is based on 80%.
Top Producer, Summer 2010