IRS Issues More Info On Healthcare Bill

For months now, both sides have been firing shots in the health care reform debate. Despite the fact that we now have a signed bill, many of the details are yet to be worked out and that causes concern that the bill will either be overworked or under reaching; my best guess is that it’s somewhere in between.

Although most of the big pieces of the actual health care reform don’t go into effect for a number of years, the IRS has been working to get information to taxpayers about the bits that have an immediate impact. Some guidance was released last month – and this week, the IRS provided more information in the form of a notice. Here’s what you need to know:

1. Tax Credits for Small Businesses. A tax credit may be available to encourage small businesses to offer health insurance coverage for the first time or maintain coverage they already have. In general, the tax credit is available to small employers that pay at least half the cost of single coverage for their employees.

The maximum credit available is 35% of health insurance premiums paid in 2010 by eligible small business employers and 25% of premiums paid by eligible employers that are tax-exempt organizations. The maximum credit will increase to 50% for eligible small business employers and to 35% for eligible employers that are tax-exempt organizations by 2014.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent employees paying wages averaging less than $50,000 per employee per year; eligibility is based on full-time equivalent employees and not the total number of employees.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. Start dates for tax-exempt employers have not yet been released.

2. Health Insurance for Older Children. Last week, Health and Human Services Secretary Kathleen Sebelius managed to wrangle commitments from a number of national insurance companies to extended coverage for older children (those under 27). It was unclear, however, whether parents would have to pay taxes on the additional insurance if were made available through work. The IRS has now indicated that the additionally coverage will be generally tax-free to the employee, effective March 30, 2010.

The IRS has issued a notice (Notice 2010-38, downloads as a pdf) which clarifies that employers with cafeteria plans (benefit plans) may allow employees to immediately make pre-tax salary contributions to provide additional insurance coverage for children under age 27. For purposes of the break, a child on the insurance plan would include a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.

IRS Commissioner Doug Shulman said, about the plan, “These changes give employers a unique opportunity to offer a worthwhile benefit to their employees,” IRS Commissioner Doug Shulman said. We want to make it as easy as possible for employers to quickly implement this change and extend health coverage on a tax-favored basis to older children of their employees.”

—

Not huge news, more like baby steps. But at least we’re getting some guidance. Stay tuned for more information.

Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

See Full Bio