What You Need to Know

About the Small Business

Tax Credit

The new health reform law, the Patient Protection and Affordable
Care Act (PPACA), was passed by Congress and was signed by
President Obama on March 23, 2010.
One of the provisions of the new health reform law gives a tax
credit to certain small employers that provide health care coverage
to their employees. Below is an abbreviated summary of this
provision’s highlights.

Effective Dates for Tax Credit

n This provision will become effective beginning in the 2010 tax year.

n An enhanced version of the credit will be effective beginning in 2014.

Employer Eligibility Rules

n An employer must offer health care coverage to qualify for the tax credit. The rules change over
the next several years. To qualify, an employer must cover:

•P
 hase I: 2010 – 2013. To qualify for the tax credit in Phase I, an employer must cover at least
50% of the cost of single health care coverage for workers receiving coverage

•P
 hase II: Beginning 2014. To qualify for the tax credit in Phase II, an employer must cover at
least 50% of the cost of single health care coverage for workers receiving coverage only if the
coverage is purchased through an exchange. The Phase II tax credit is only available for 2 years.

n The amount of an employer’s premium payments that count toward the credit is capped by the
average premium for the small group market in the state (or an area within the state) in which the
employer offers coverage. This average is determined by the Department of Health and Human
Services (HHS).

n A qualifying employer must have 24 or fewer FTE workers

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 n A qualifying employer must pay average annual wages of less than $50,000. Business owners, their
family members and most seasonal employees are not counted.

n The amount of average annual wages is determined by:

• First dividing the total wages paid by the employer during the employer’s tax year to eligible
employees by the number of the employer’s FTEs for the year

• The result is then rounded down to the nearest $1,000. Wages for this purpose means wages
as defined for FICA purposes

Eligibility

First, determine the total number of your groups' employees (not counting owners or family members).
Part-time hours are the total annual hours of part-time employees. Full-time employees are those who
work at least 40 hours per week.

( Total part-time hours ÷ 2080

) + Full-time employees = Total Employees

Next, calculate the average annual wages of employees (not counting owners or family members).

Total annual wages ÷ Total Employees = AVERAGE WAGES

If the average wages are less than $50,000 and your clients pay at least half of the insurance premiums
for their employees at the single (employee-only) coverage rate, then they may be eligible for the credit.

Amount of Credit

n 2010 - The credit is worth up to 35% (25% for tax-exempt employers) of a small business’ health
premium costs in 2010.

n 2014 - The rate increases to 50% (35% for tax-exempt employers) for tax year 2014, but is
available only if health coverage is purchased through an exchange.

n 2016 – The tax credit expires

n The credit amount downgrades from 35% for businesses with average wages between $25,000
and $50,000 and for businesses with between 10 and 25 FTE workers.

The information provided is intended only to be an overview of the major provisions of the small
business tax-credit included in the PPACA. Please consult with your tax advisor for further details
on how this regulation applies to your business. Additional guidance on the credit is available in IRS
Notice 2010-44 at http://www.irs.gov/irb/2010-22_IRB/ar12.html.

FOR MORE INFORMATION, CONTACT LISI AT

866.570.LISI (5474)  WWW.LISIBROKER.COM
Information for this article was obtained from IRS Notice 2010-44; Summary of Small Business Health Insurance Tax Credit Under PPACA (P.L. 111-148),
Chris Peterson and Hinda Chaikind, Congressional Research Service, 7-5700, R41158

All information published herein is gathered from sources which are thought to be reliable, but the reader should not assume that the information
is official or final. Reliance on this information received from LISI shall be at your sole risk, and LISI assumes no responsibility for any errors,
omissions, or damages arising. Users of this information are encouraged to confirm with other sources, and to seek qualified advice if embarking on
any actions that could carry personal or organizational liabilities.