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Does Your Company Qualify for the Federal Health-Care Tax Credit?

Posted by Kyle Pardo on Jun 8, 2010 3:53:00 PM

More than 102,000 Massachusetts employers may be eligible for the new federal tax credit intended to help small companies cope with the expense of providing health insurance to employees. But how do you know whether or not your company qualifies? How much is the tax credit? And what's in the fine print?

The small business health-care tax credit provision of federal health care reform (Patient Protection and Affordable Care Act, or PPACA) was created to reduce health insurance costs for employers with fewer than 25 full-time equivalent (FTE) employees.  The amount of the income tax credit is graduated based on the number of FTEs, but the maximum for the 2010-2013 tax years is 35 percent of the amount a qualifying employer contributes toward the cost of coverage for its employees. That's real money if you run a small business. 

The IRS recently sent post cards to approximately four million businesses nationwide that may be eligible for the tax credit, including more than 102,000 in Massachusetts.  The tax credit is available to employers meeting all four of the following criteria for tax years 2010 - 2013:

  1. The employer must either be a taxable employer or a 501(c) tax-exempt employer;
  2. The employer must have fewer than 25 full-time equivalent employees for the tax year;

    The definition of one FTE is 2,080 payroll hours per year.

    "Payroll hours" include all hours worked, as well as all hours paid but not worked (vacation, holidays, sick time, jury duty and all other paid absences).

    Seasonal workers may be excluded if they work no more than 120 days in the year. It is important to remember that the definitions of FTE and "seasonal employee" are different under the federal and Massachusetts health care reforms, and many small employers must use both - just one small example of the growing complexity of integrating state and federal requirements.

  3. The average annual wages for each FTE must total less than $50,000, calculated by dividing the total gross wages, i.e., before any deductions are made for taxes, 401(k), benefits, etc., by the number of FTEs; and
  4. The employer must contribute at least 50 percent of the individual premium cost for health insurance provided through a qualifying arrangement.  This is known as the "uniformity requirement."  The definition of "health insurance" includes medical insurance, stand-alone dental plans, stand-alone vision plans, and long-term care plans.  

For purposes of both the FTE and average wage calculations above, certain business owners, partners, and their family members, as defined in IRS guidance, are excluded, i.e., they are not deemed to be "employees."

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Topics: Associated Industries of Massachusetts, Health Care Reform, Health Care Costs, Controlling Health Care Costs, Health Insurance

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