Q&A: Health insurance credit

July 9, 2010

Be aware of the tax changes in the health reform legislation.

Q: What are the tax changes in the healthcare reform legislation affecting small businesses that buy health insurance for employees?

A: Small employers that provide healthcare coverage to their employees and meet certain requirements generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, the employer must have fewer than 25 full-time equivalent employees for the tax year, the average annual wage of an employee for the year must be less than $50,000, and the employer must pay the premiums under a "qualifying arrangement." Under a qualifying arrangement, the employer pays premiums for each employee enrolled in healthcare coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.

The credit is initially available for any tax year beginning in 2010 to 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is generally health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning in years after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for a maximum coverage period of two consecutive tax years.

A sole proprietor, a partner in a partnership, a shareholder owning more than 2 percent of an S corporation, and any owner of more than 5 percent of other businesses are not considered employees for purposes of the credit.

Answer provided by Ronald J. Knueven, Clayton L. Scroggins Associates Inc., Cincinnati, Ohio. Send your practice management questions to medec@advanstar.com
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