The Patient Protection and Affordable Care Act was passed by Congress and was signed by President Obama on March 23, 2010. Included in this Act is a Federal income tax credit, effective with tax years beginning in 2010, for certain small employers or tax- exempt organizations who provide health coverage to their employees.

Eligible small employers can qualify for a credit of up to 35% (25% for tax-exempt organizations) of premiums paid in 2010. On January 1, 2014, the rate increases to 50% (35% for tax-exempt organizations).

Who Qualifies?

• The business must contribute at least 50% of the health insurance premiums for its employees under a qualifying arrangement.
• The business must have 25 or less full-time equivalent (FTE) employees.
• The employer must pay average annual wages below $50,000.
  
  The credit phases out gradually if the number of full-time equivalents exceed 10 or average annual wages exceed $25,000.

A qualifying arrangement is one in which the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage, not less than 50%. For 2010, there is transition relief to make it easier for employers to meet the requirements for a qualifying arrangement.

For the years 2010 through 2013, qualifying health insurance for claiming the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to eligible small employers that purchase health insurance coverage through a state exchange and is only available for two years.

To calculate the number of full-time equivalent employees (FTE's), the total amount of hours for which wages are paid during the year (not to exceed 2080), is divided by 2080. The result is rounded to the next lowest whole number. Employers with part-time employees may still qualify for this credit.

The average annual wages are determined by dividing the total wages paid by the employer during the employer's tax year by the number of the employer's FTE's for the year. The result is rounded down to the nearest $1,000.

Seasonal workers, sole proprietors, partners in a partnership, shareholders owning more than 2% of an S corporation, any owner of more than 5% of other businesses and family members are NOT considered employees for purposes of this credit.

The credit is claimed on the employer's annual Federal income tax return. The credit will offset an employer's actual income tax liability or alternative minimum tax liability. Any unused credit can be carried back one year or forward twenty years. For 2010, any unused credit can only be carried forward. For tax-exempt employers, the IRS will provide further information on how to claim the credit.

If you would like to discuss the impact of these rules, please feel free to call us at 203-787-6527 or contact us through our website at www.bhco.com.