Small Employer Health Insurance Credit

(Note : For the next few weeks, Health Reform Talk will focus on detailed explanations for specific provisions in the new health reform law.)

So what’s included in Sec. 1421 and 10105 of the Affordable Care Act, concerning the small employer tax credit?

An eligible small employer may claim a tax credit in tax years beginning after 2009 if it makes nonelective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of its participating employees. For the purposes of this section, a small employer is defined as having 25 or fewer full-time equivalent employees, the average annual wages of these employees is not greater than twice the applicable dollar amount for the tax year ($25,000 in tax years beginning in 2010 through 2013); and the employer has a qualified health care arrangement in effect.

The amount of the credit for employee health insurance expenses of an eligible small employer in tax years beginning in 2010 through 2013 is equal to 35% of the lesser of:

(1) the total amount of nonelective contributions the employer makes on behalf of its employees during the tax year under a contribution arrangement for the payment of premiums for qualified health insurance coverage of its employees, or

(2) the total amount of nonelective contributions that would have been made during the tax year if each employee taken into account in item (1) had enrolled in a qualified health plan which had a premium equal to the amount that the Health and Human Services (HHS) determines is the average premium for the small group market in the state in which the employer is offering health insurance coverage.

In effect, this limitation prevents an employer from claiming the credit on the portion of employer paid premiums that exceeds the average premium charges in the state’s small group market.

Health insurance credit amount for tax years beginning after 2013. An eligible small employer may claim a health insurance credit for any tax year beginning after 2013 during the credit period. The credit period is the two-consecutive-tax year period beginning with the first tax year in which the employer or any predecessor offers one or more qualified health plans to its employees through an Exchange. No credit period is treated as beginning with a tax year beginning before 2014. For example, the health insurance credit may only be claimed for two additional tax years in tax years that begin after 2013 (e.g., for 2014 and 2015 in the case of a calendar-year eligible small employer) and only if the eligible small employer offers one or more qualified health plans through an Exchange during those years.

The credit amount for a tax year beginning after 2013 is equal to 50% of the lesser of:

(1) the total amount of nonelective contributions the employer makes on behalf of its employees during the tax year under a contribution arrangement for premiums for qualified health plans offered to its employees through an Exchange, or

(2) the total amount of nonelective contributions that would have been made during the tax year if each employee taken into account in item (1) had enrolled in a qualified health plan which had a premium equal to the average premium for the small group market in the rating area in which the employee enrolls for coverage.

Contribution arrangement defined. The employer must make nonelective contributions through an “arrangement.” In the case of a tax year beginning in 2010 through 2013, the arrangement must require an employer to make a nonelective contribution on behalf of each employee who enrolls in a qualified health plan offered to employees by the employer in an amount equal to a uniform percentage, but not less than 50%, of the premium cost of the qualified health plan. An employer contribution is considered a nonelective contribution so long as it is not made through a salary reduction arrangement. For a tax years beginning after 2013, the arrangement must offer the insurance through an Exchange. For earlier tax years, the arrangement may, but is not required to, offer the insurance through an Exchange.

Credit phaseout. The credit is reduced (but not below zero) by the sum of:

(1) The product of (a) the credit amount and (b) the number of the employer’s full-time equivalent employees for the tax year in excess of ten, divided by 15; and

(2) The product of (a) the credit amount and (b) the employer’s average annual wages in excess of the applicable dollar amount for the tax year ($25,000 in tax years beginning in 2010 through 2013) divided by the applicable dollar amount.

The reduction of the credit amount required by item (1) for having more than ten full-time equivalent employees is in effect equal to 6.667% for each qualified employee in excess of ten. Thus, if an employer has 25 or more full-time employees the credit is reduced to zero (6.667% times 15 employees (the number in excess of 10) equals a 100% reduction). The credit may not be claimed even if the average annual wages for the year do not exceed the $25,000 application dollar amount.

Effective date. The small employer health insurance credit and related amendments apply to amounts paid or incurred in tax years beginning after December 31, 2009.

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