New Instructions for the Small Employer Tax Credit Under PPACA


Small employers (generally defined as fewer than 25 full-time employees with average annual wages less than $50,000 per full-time employee) should take note of new guidance that makes it easier for them to determine whether they are in fact eligible for the new health care tax credit under the Patient Protection and Affordable Care Act (PPACA).  Internal Revenue Service (IRS) Notice 2010-44 (pdf) also provides step-by-step explanations, including more than a dozen examples, of how to calculate and then claim the credit.

Beginning this tax year, Section 45R of the Internal Revenue Code (Code) offers a tax credit to small employers that provide health insurance coverage to their employees.  According to Notice 2010-44, the following steps must be taken to establish an employer’s eligibility for the tax credit:  (1) determine the employees who are taken into account for purposes of the credit (partners and certain business owners and their families are not taken into account); (2) determine the number of hours of service performed by those employees (either actual hours may be counted or equivalencies may be used); (3) calculate the number of the employer’s full-time equivalent employees; (4) determine the average annual wages paid per full-time employee; and (5) determine the health insurance premiums paid by the employer that are taken into account in calculating the credit – i.e., the premiums must be paid by an employer under a qualifying arrangement and must be paid for health insurance that meets Section 45R requirements.  Notably, limited scope dental or vision coverage, as well as long-term, nursing home and home health care coverage, among others, are eligible to receive the credit. 

Of particular interest, the IRS guidance also makes clear that small businesses receiving state health care tax credits may still qualify for the Federal income tax credit.  For taxable years beginning 2010 through 2013, the maximum credit is 35% of a taxable eligible small employer’s premium payments and 25% of the premium payments for a tax-exempt, 501(c) small employer. 

Steven J. Friedman authored this entry.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.