The Billups Company CPA's, Inc.

A key provision of the health care reform bill is a general business credit designed to help small businesses provide health care insurance to employees. For years 2010 through 2013, the credit is 35% of the non-elective contributions employers make on behalf of employees for insurance premiums. After 2013, the credit increases to 50% of the contributions.

As with all tax legislation, the devil is in the details. In the case of this provision the important detail is which small businesses qualify for the credit. The legislation defines eligible small employers (ESE) as an employer with average annual full time equivalent wages of less than $50,000 and fewer than 25 full time equivalent (FTE) employees. If a company exceeds either threshold, they are not an eligible small employer and do not qualify for the credit.  Companies that have fewer than 10 FTE employees and average wages of less than $25,000 may claim 100% of the credit. The credit that may be claimed is reduced for ESE’s who have more than 10 employees or more than $25,000 in average wages.

After 2013 the credit will only be available for health insurance purchased through a State exchange, and it will only be available for two consecutive years.

The credit is claimed on the employer’s tax return for the year in which the contributions are paid. It can only be used to offset actual tax liabilities and, since it is a general business credit, it may be carried back one year or carried forward 20 years to offset taxes in those years. The credit does not apply to premium payments made for self-employed individuals, partners, S Corporation shareholders owning 2% or more of the corporation, or 5% or more owners of the employer.

Given the restrictive definition of ESE’s it will be interesting to see how effective this credit is as a catalyst to improving insurance coverage. With median wages in the US at about $39,000 the available credit for the average employer will likely be reduced considerably. Many small companies, such as those providing professional services, are unlikely to meet the average wage threshold and will probably not be eligible for any credits at all.

That said, the credit will reduce costs for some employers who currently provide health insurance and it could provide a tool for companies who hire lower wage workers to cost-effectively provide health insurance benefits to their employees as a means of attracting and retaining good employees.  Employers should do a detailed cost/benefit analysis before committing to the addition of  a costly new employee benefit.