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Small employers, complicated health insurance law: an update

In less than a month, state-based “exchanges” in California and across the nation will begin signing up people for health insurance under the Affordable Care Act (ACA). The marketing campaigns for these exchanges are already well underway.

We’ve been following the tax considerations of ACA implementation regularly in this blog, with particular attention to its impact on small businesses. As we explained in our May 24 post, small business owners are often unsure about how to respond to the various tax credits available to help implement the new law.

In this post, we’ll discuss a proposed rule issued by the IRS about two weeks ago that applies to certain small employers. More specifically, the rule concerns tax credits for employers with 25 or fewer full-time employees who meet specified conditions

For tax purposes under the ACA, a “small business” is more often defined as one with fewer than 50 full-time employees. Employers who employ 50 or more employees are facing possible tax penalties under the ACA if they do not offer affordable health insurance options.

In this case, however, the tax credit is aimed at small employers that employ a maximum of 25 full-time employees. But in order for the employer to obtain the tax credit, the employees must be below a stated threshold of annual income. Under the proposed rule, that threshold is $50,000.

Obviously $50,000 is not a huge annual salary. But the goal of the rule is not to reward employers for keeping wages down. It is, rather, to encourage smaller, low-wage businesses to offer health insurance options to their employees.

The proposed rule is quite complex, however, and the tax credit in question is only temporary. The complexity comes, for example, in detailed calculations regarding how to count the number of full-time employees.

In short this proposed rule is only one small piece of a much larger puzzle. That puzzle is how businesses and individuals will respond the ACA and its tax consequences.

Source: Bloomberg BNA, ""IRS Issues Proposed Rule on ACA Small Business Tax Credit," August 28, 2013