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Regulation and Compliance > Federal Regulation > IRS

IRS Starts Applying Small Group Tax Credit

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The Internal Revenue Service has published a table that small employers can use to calculate their health insurance credit for the 2010 taxable year.

Employers with 25 or fewer employees and an average wage of less than $50,000 per year may be able to use the tax credit to deduct up to 35% of health insurance premium payments from their federal income taxes.

Congress created the tax credit when it approved Section 1421 of the new Patient Protection and Affordable Care Act, which added Section 45R to the Internal Revenue Code. Starting in 2014, the maximum Section 45R tax credit will be 50% of the cost of coverage, IRS officials write in IRS Revenue Ruling 2010-13.

From 2010 until the 50% tax credit level kicks in, employers with 10 or fewer employees and an average wage of $25,000 or less will get a credit of up to 35%.

Employers with 11 to 25 employees, or 25 or fewer employees with an average wage of $25,000 to $50,000, will get a partial credit, officials say.

The value of the credit to a specific employer will depend on the cost of the employer’s coverage.

An employer that offers an average-cost plan or a plan that costs less than average can use the full cost of coverage as the basis for determining the tax credit, officials write.

If the employer’s plan costs more than the average, the employer can deduct only the amount it would have paid for average-cost coverage, officials write.

The table the IRS has published in Revenue Ruling 2010-13 gives what the IRS believes to be the average cost of individual and family coverage in each state.

The secretary of the U.S. Department of Health and Human Services can carve out regions with higher rates and allow employers to use higher average cost figures in those regions, but the HHS secretary will not carve out any below-average-cost regions, officials write.


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