Section 45R was just added to the Internal Revenue Code by the Patient Protection and Affordable Care Act. It is effective for taxable years beginning in 2010 and applies to both taxable, as well as tax exempt small employers. To be considered a small employer, the employer must have fewer than 25 full-time equivalent employees (FTE) for the tax year. The average annual wages for the employees must be less than $50,000 per FTE. Finally, the employer must maintain a qualifying arrangement� under which the employer pays a certain percentage of the premiums (approximately 50% or more) for each employee enrolled in the company plan.
The credit is worth up to 35% of a small business premium cost in 2010 (25% for tax-exempt employers). This will then increase to 50% for tax years on or after 2014 (35% for tax exempt employers). Unfortunately, the credit phases out gradually for companies with between $25,000 and $50,000 of average wages, and also for firms with the equivalent of between 10 and 25 full-time workers. And, beginning in 2014, the credit will only be available for a two year period and only apply to coverage which has been purchased through one of the new health insurance exchanges.
IRS rules regarding this new tax credit can be found in Notice 2010-44, and also in follow up Notice 2010-82. For example, Notice 2010-82 clarifies how an employer that offers more than one plan determines whether its contribution amount meets the necessary threshold for a qualifying arrangement. The IRS has even released several additional informational materials, including: Three Simple Steps Fact Sheet, Frequently Asked Questions, and a YouTube Video. Check with your CPA on the details to see if you qualify and for how much.
