Health Care Reform Update: New Small Business Tax Credit

Valerie Koch is the Vice President & Chief Operating Officer of The Ganim Group in Bridgeport, CT.  

One of the first provisions to become effective with the New Health Care Reform Legislation is the Small Business Tax Credit. Congress created the tax credit when it approved Section 1421 of the new Patient Protection and Affordable Care Act, which added Section 45R to the Internal Revenue Code. For tax years 2010 through 2013, small employers will receive a tax credit of up to 35 percent of the employer's contribution toward their employee's health insurance premium if the employer contributes at least 50 percent of the total premium cost, or 50 percent of a benchmark premium. The full credit will be available to employers with 10 or fewer employees with average annual wages of less than $25,000.

Starting in 2014, the maximum Section 45R tax credit will be 50% of the cost of coverage, IRS officials write in IRS Revenue Ruling 2010-13.

For purposes of this tax credit, a Small Employer is defined as an employer with no more than 25 full time equivalent (FTE) employees. A FTE employee is determined by dividing the total number of hours of service for which wages were paid by the employer during the taxable year by 2,080, rounded to the next lowest whole number. If an employee works in excess of 2,080 hours of service during any taxable year, the excess is not taken into account. Seasonal workers are excluded unless they work more than 120 days per year. Owners and family members are also excluded.