Small Practices May Get Relief from a New Health Insurance Tax Credit

Health insurance premiums are probably heading up in the wake of the recently enacted healthcare reform law, but that piece of legislation may also hold out some relief from the higher premiums. The new law offers a tax credit of up to 35% of health insurance costs to small businesses that are eligible.

The eligibility rules are enormously complex, but there are three basic hurdles you must clear to get in on the tax credit: First, you must have 24 or fewer full-time equivalent employees. If you hire part-timers, you need to apply a formula that uses the number of hours they work and translates that into the equivalent number of full-time employees. Second, the average annual wage for your employees must be less than $50,000. And finally, you must pay at least half of the cost of health insurance for you employees, based on the rate for single coverage.

Although those eligibility rules may sound fairly simple, these are a number of twists on the road to the tax credit. Some hours worked by part-timers may be excluded from the formula, for example, and the full 35% credit goes only to companies that have 10 or fewer employees and pay an average annual wage of less than $25,000. The credit starts to phase out if you have more than 10 employees or pay them more than the $25,000 average annual wage.

The National Federation of Independent Business has a simple calculator to help crunch the numbers for you. But the NFIB warns on its Web site that these calculations could change if: (1) the firm uses part-time employees; (2) the owner and his or her family purchase their insurance separately; (3) the firm has a mix of individual and family policies in its pool; and (4) the Secretary of the Department of Health & Human Services determines that the company plan is more expensive than some "average" plan (to be defined later). The credit is also neither refundable nor transferable, meaning it can only be used to offset actual tax liabilities, the NFIB says.

Despite the complexities, the savings for small practices could be considerable. Unlike a tax deduction, which merely reduces your taxable income, a tax credit lowers your tax bill dollar-for-dollar. You can learn more about eligibility for the credit at the Internal Revenue Service website. It’s also a good idea to check with your tax advisor to ensure you qualify.