The Patient Protection and Affordable Care Act (“PPACA”) created a new tax credit that is available in 2010 for small employers (generally fewer than 25 employees) who provide health insurance to their employees. The maximum amount of the tax credit is 35 percent of the employer’s premium expenses in 2010 through 2013 tax years.

To be eligible for this tax credit:
• The employer must have fewer than 25 full-time employees (“FTEs”) during the tax year.
• The average annual wages of the employees must be $50,000 or less.
• The employer must pay at least 50 percent of the premium costs.

Employers with 10 FTEs and an average wage of $25,000 or less would receive the full 35 percent tax credit. With more employees, or a higher wage, the tax credit percentage is reduced until it is eliminated totally at the point of 50 FTEs and/or average wage of over $50,000.

The number of FTEs is determined by dividing the total hours worked by 2,080. (No more than 2,080 hours can be counted for any one employee.) Neither the hours nor the wages of the business owner are included in this calculation. Also excluded are the hours and wages of seasonal employees, which are those employees who work less than 120 days for the employer.

The premium paid by the employer does not include the employee’s premium cost paid through a cafeteria or “premium-only” plan. Additionally, the premium cost considered for the credit is capped at the average premium for the small group market in that state. (In Minnesota, the average premium is $4,704 for single; $11,938 for family coverage.)

The actual tax deduction an employer can declare for health premiums will be reduced by any tax credit received under this program. For tax-exempt entities, the tax credit is a refundable credit against income tax withholding and Medicare tax liability.

For guidance on how this tax credit might impact your business, contact your Larkin Hoffman attorney.