Small business health care tax credit for insurance premiums paid in 2010

December 2, 2010 by Reed Lamoreaux

As part of the recently enacted health care legislation, qualifying small businesses can now take a tax credit for up to 35% of the health insurance premiums paid on behalf of their employees during 2010.  For a complete analysis of the credit, please read this article from the Journal of Accountancy.

If you have any questions on whether this credit will apply to your situation please contact me, Reed Lamoreaux, or another professional at the Las Vegas CPA firm of Wallace Neumann & Verville LLP.  I have written a summary below.

A small business has basically three hurdles to overcome to qualify for the credit:

  1. Your business must have fewer than 25 full-time equivalent employees (FTEs).
  2. The average salary of the full-time equivalent employees must be less than $50,000.
  3. Your business must pay for at least half of the employee’s health insurance premiums in 2010.

The IRS has issued several notices defining what they will consider a full-time equivalent employee. The easiest example is to take the total regular hours worked by all the employees for the year (excluding overtime and including hours credited for sickpay, personal days, comp time, vacations, etc.) and then divide by 2080.  IRS notice 2010-44 has the following example to illustrate this point:

  • Determining the Number of an Employer’s FTEs (owners and partners are not included in this calculation)
  • The number of an employer’s FTEs is determined by dividing (1) the total hours of service, determined in accordance with section II.C of this notice, credited during the year to employees taken into account under section II.B of this notice (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. In some circumstances, an employer with 25 or more employees may qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and, therefore, may qualify for the credit.

Example 3 — Determining the number of FTEs. (i) For the 2010 taxable year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours. The employer does not use an equivalency method to determine hours of service for any of these employees.

(ii) The employer’s FTEs would be calculated as follows:

(1) Total hours of service not exceeding 2,080 per employee is the sum of:

a. 10,400 hours of service for the 5 employees paid for 2,080 hours each (5 × 2,080)

b. 3,120 hours of service for the 3 employees paid for 1,040 hours each (3 × 1,040), and

c. 2,080 hours of service for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080).

d. The sum of a, b and c equals 15,600 hours of service.

(2) FTEs equal 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number).

Example 4 — Determining the number of FTEs: (i) For the 2010 taxable year, an employer has 26 FTEs with average annual wages of $23,000 per FTE. Only 20 of the employer’s employees are enrolled in the employer’s health insurance plan.

(ii) The hours of service and wages of all employees are taken into consideration in determining whether the employer is an eligible small employer for purposes of the credit. Because the employer does not have fewer than 25 FTEs for the taxable year, the employer is not an eligible small employer for purposes of the credit.

For purposes of determining if the average salary is less than $50,000 for the year, you would take the total amount of wages for the year (less amounts paid to the owners and partners) and divide this total by the number of FTEs (as calculated above), rounding down to the nearest $1,000.

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