Effective for taxable years beginning in 2010, recent health care reform legislation permits a tax credit to certain small employers that provide health insurance coverage to their employees. Both taxable employers and IRC section 501(c) tax-exempt employers may be eligible for the credit.

Employers that satisfy the requirements for the credit are referred to as "eligible small employers." In order to be an eligible small employer:

- employer must have fewer than 25 full-time equivalent employees (FTEs) for the taxable year;
- average annual wages of its employees for the year must be less than $50,000 per FTE;
- employer must maintain a "qualifying arrangement."

A qualifying arrangement is an arrangement under which the employer pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 %) of the premium cost of the coverage. (There is transition relief for taxable years beginning in 2010 with respect to the requirements for a qualifying arrangement which is beyond the scope of this summary).

The maximum credit of 35% for 2010 (25% for tax-exempt employers) is available to employers with 10 or fewer full-time equivalent employees (FTEs) paying average annual wages of not more than $25,000. The credit is reduced by 6.667% for each FTE in excess of 10 employees and by 4% for each $1,000 that average annual compensation paid to employee exceeds $25,000. Beginning in 2014, the credit will cover 50% of premiums for qualified for-profit small employers (35% for qualified tax-exempt employers). The credit is completely phased out as the number of employees (FTE) reach over 25.

Further, premiums eligible for the credit must be paid by an employer under a qualifying arrangement and must be paid for health insurance that meets certain qualifications specified within the Internal Revenue Code.

For additional information on the Small Employer Health Insurance Tax Credit, please visit http://www.irs.gov/businesses/small/article/0,,id=220749,00.html.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

For further information, please contact Eva Mruk, Director of Tax Compliance, at 212-867-4000 or emruk@loebandtroper.com.

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About Loeb & Troper LLP

Loeb & Troper LLP is a leading regional professional services firm with a targeted focus and specialized expertise.  Established in 1919, the firm specializes in meeting the unique needs of health care, not-for-profit and special needs organizations by providing comprehensive audit, tax and consulting services.  The firm’s industry specialization has made it a highly-valued advisor and resource to some of the leading organizations in its fields of practice.   The firm has remained true to its core promises of industry-specific expertise, industry-specific leadership, active partner involvement, superior client service and a culture of integrity for ninety years.