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IRS Provides Guidance on New Small Business Health Care Credit

July 08, 2010

The IRS has issued detailed guidance on the small employer health insurance credit created by the recently-enacted health reform legislation. Under the new law, effective for tax years beginning after Dec. 31, 2009, an eligible small employer (ESE) may claim a tax credit for non-elective contributions to purchase health insurance for its employees.

An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000.

The new guidance adopts a liberal approach to the new law's requirements, including three alternative methods for figuring total hours of service (important for determining how may FTEs an employer has), and also explains how small employers claim the credit if their State provides a credit or subsidy for employee health coverage.

The IRS has released a state-by-state table of average health insurance premiums for the small group market for the 2010 tax year. The table is needed to calculate the credit for this year.

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