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Health Care Act Provides New Tax Benefits for Employers and Employees

Small businesses and tax-exempt organizations that employ low to moderate income workers may benefit from a new tax credit that was passed as part of the Patient Protection and Affordable Care Act (“Affordable Care Act”) legislation in March. In general, the tax credit applies to employers that employ less than 25 full-time equivalent (FTE) employees who are paid, on average, less than $50,000 per employee per year. Because eligibility is based on an employer’s number of FTE’s, employers who employ more than 25 workers total may still qualify for the credit as long as no more than 25 of those workers are FTE’s. The credit was enacted to encourage small employers to offer health coverage to their employees. Eligible small businesses may receive up to a maximum 35% credit for premiums paid in 2010, and eligible tax-exempt organizations may receive up to a maximum 25% credit. The maximum credit increases to 50% in 2014 for small businesses and 35% for tax-exempt organizations. Businesses employing 10 or less FTE’s will receive the maximum credit. According to the IRS, eligible businesses can claim the credit as part of the general business credit on their 2010 tax returns filed in 2011. The IRS announced it will provide further information regarding how tax-exempt organizations can take advantage of the credit.

Another provision of the Affordable Care Act allows employers to offer tax-free health care coverage for children under the age of 27 to employees. Effective immediately, employers with cafeteria plans (plans that allow employees to elect between cash and certain qualified benefits, such as health flexible spending arrangements) can permit employees to make pre-tax salary deductions to provide coverage to children under 27, even if the cafeteria plan has not been amended to include these individuals. However, plan sponsors must amend the plan before the end of 2010. The Affordable Care Act also changed the tax rules to require plans that provide dependent coverage of children to make such coverage available until adult children reach the age of 26. This coverage must be provided no later than plan years beginning on or after September 23, 2010.

For more information regarding these new tax benefits or other pension and benefits questions, please contact the benefits attorneys at Bingham McHale.

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