EBIA Weekly Newsletter

IRS Issues More Small Business Health Care Tax Credit Transition Relief for Certain Small Employers

   May 3, 2018

IRS Notice 2018-27 (Apr. 27, 2018); IRS News Release IR 2018-108 (Apr. 27, 2018)

The IRS has issued Notice 2018-27, providing transition relief for certain eligible small employers. As background, the Code § 45R small business health care tax credit has been available since 2010, with significant changes taking effect for years after 2014 (see our Checkpoint article). The tax credit is generally available for two consecutive years to employers that have fewer than 25 employees, pay average annual wages of less than $50,000 (indexed for inflation), and contribute a uniform percentage of at least 50% of the premium costs for employee health insurance coverage obtained through a Small Business Health Options Program (SHOP) Exchange. The maximum tax credit is generally 50% of premiums paid (35% for tax-exempt eligible small employers). Before 2014, health insurance coverage did not need to be provided through a SHOP Exchange, and the two-year limit did not apply. Previous transition relief was issued for counties without SHOP Exchange coverage in 2014 (IRS Notice 2014-6, see our Checkpoint article), 2015 (IRS Notice 2015-08, see our Checkpoint article), and 2016 (IRS Notice 2016-75, see our Checkpoint article).

The new transition relief is available for eligible small employers who first claimed the small business health care tax credit for all or part of 2016 or a later year, by offering coverage through a SHOP Exchange or qualifying for previous transition relief, but whose principal place of business is in a county where SHOP Exchange coverage is subsequently unavailable. These eligible small employers may still claim the tax credit for coverage provided outside of a SHOP Exchange for 2017 and later years—subject to the applicable two-consecutive-year limit—so long as the coverage they offer would have qualified under the rules applicable before 2014. Examples emphasize that this transition relief is not available to employers that were not eligible for the tax credit for at least part of a year during their two-year limit. For example, a new employer whose place of business is in a county where SHOP Exchange coverage is unavailable will not be able to take advantage of this transition relief. Lists of counties not offering federal SHOP Exchange coverage or state SHOP Exchange coverage in 2017 are available online.

EBIA Comment: This transition relief is very limited, applying only to employers who qualified for the tax credit in 2016 or later (offering SHOP Exchange coverage, or relying on transition relief under IRS Notice 2016-75), and who cannot purchase SHOP Exchange coverage in their county for the remainder of their two-consecutive-year limit. The notice clarifies that it is not intended to modify the existing transition relief and does not affect the prohibition making employers in Hawaii unable to claim a small business health care tax credit for the five-year period of 2017–2021, which is part of Hawaii’s approved state innovation waiver. For more information, see EBIA’s Health Care Reform manual at Sections XXI.D “Small Business Health Options Program (SHOP)”) and XXVI (“Small Business Health Care Tax Credit”).

Contributing Editors: EBIA Staff.