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Transition relief allows certain small employers to claim Code Sec. 45R health care credit

December 18, 2013

In a Notice, IRS has provided transitional relief under Code Sec. 45R to certain small employers that cannot offer a qualified health plan (QHP) through a Small Business Health Options Program (SHOP) Exchange because the employer’s principal business address is in a county in which no QHP through a SHOP Exchange will be available for the 2014 calendar year. In general, if the eligible small employer provides health coverage for the 2014 health plan year that would have qualified for a Code Sec. 45R credit under the rules applicable to pre-2014 tax years, then the employer may claim the credit.

Background. Under Code Sec. 45R, which was added by the Patient Protection and Affordable Care Act (Affordable Care Act, P.L. 111-148), effective for tax years beginning after Dec. 31, 2009, a tax credit is offered to certain small employers that provide health insurance to their employees (“eligible small employers,” or ESEs).

For tax years beginning after Dec. 31, 2013, the credit is available only with respect to premiums paid by a small employer for a QHP offered by the employer to its employees through a SHOP Exchange, and is available only for a two-consecutive-tax-year period. Additionally, for tax years beginning after Dec. 31, 2013, the maximum credit rate is increased to 50% from 35% for ESEs (and to 35% from 25% for tax-exempt ESEs). (Code Sec. 45R(b))

In August of this year, IRS issued proposed reliance regs under Code Sec. 45R (see Weekly Alert ¶  27  08/29/2013 for more details) that provide guidance on determining eligibility for the credit and calculating and claiming the credit. The proposed regs also provide a transition rule for an ESE with a group health plan year that begins on a date in 2014 other than the first day of the employer’s tax year.

Specifically, the proposed regs provide that if the following requirements are met, then an ESE will be treated as offering coverage through a SHOP Exchange for its entire 2014 tax year for purposes of eligibility for, and calculation of, a Code Sec. 45R credit:

 

1. as of Aug. 26, 2013, a small employer offers coverage for a plan year that begins on a date other than the first day of its tax year;
2. the employer offers coverage during the period before the first day of the plan year beginning in 2014 that would have qualified the employer for the credit under the rules otherwise applicable to the period before Jan. 1, 2014; and
3. the employer begins offering coverage through a SHOP Exchange as of the first day of its plan year that begins in 2014.

 

For an employer that meets these requirements, the proposed regs provide that the credit will be calculated at the 50% rate (35% for tax-exempt ESEs) for the entire 2014 tax year, and the 2014 tax year will be the start of the two-consecutive-tax-year credit period. (Prop Reg § 1.45R-3(i)) Employers may rely on the proposed regs for tax years beginning after Dec. 31, 2013, and before Dec. 31, 2014.

Issue. IRS have been advised by the Department of Health and Human Services (HHS) that for calendar year 2014, SHOP Exchanges in certain counties in Washington and Wisconsin will not have QHPs available for employers to offer to employees. Under HHS regs governing eligibility for SHOP Exchanges, an employer may either (1) offer coverage to all of its eligible employees through the SHOP whose service area includes the employer’s principal business address, or (2) offer coverage to each eligible employee through the SHOP whose service area includes that employee’s primary worksite. Under either approach, an employer may offer SHOP coverage to employees whose primary worksite is at its principal business address only if that address is located within the service area of the SHOP. As a result, absent transition relief, an otherwise eligible small employer with its principal business address in a county without any QHPs available would be denied the opportunity to claim the Code Sec. 45R credit for 2014.

To provide these otherwise eligible small employers an opportunity to claim the Code Sec. 45R credit for 2014, this notice provides transition relief for those employers for the plan year of the employer’s group health plan beginning in 2014. In addition, this notice modifies the application of the transition rule in the proposed regs for an ESE with a principal business address in one of the counties listed in Notice 2014-6, Sec. IV (listed counties) with a group health plan year that begins on a date in 2014 other than the first day of the employer’s tax year. (Prop Reg § 1.45R-3(i))

Transition relief. An ESE with a principal business address in one of the listed counties may calculate the Code Sec. 45R credit by treating health insurance coverage provided for the 2014 health plan year as qualifying for the credit, provided that the coverage would have qualified for a credit under the rules applicable before Jan. 1, 2014 (i.e., the effective date of the proposed reliance regs). This treatment applies with respect to the health plan year beginning in 2014, including any portion of that plan year that continues into 2015. If the ESE claims the Code Sec. 45R credit for the 2014 tax year, the credit will be calculated at the 50% rate (35% for tax-exempt ESEs) for the entire 2014 tax year, and the 2014 tax year will be the first year of the two-consecutive-tax-year credit period. And, if the ESE claims the Code Sec. 45R credit for the portion of the 2014 health plan year that continues into 2015, the tax credit will be calculated at the 50% rate (35% for tax-exempt ESEs) for the corresponding portion of the 2015 tax year.

In addition, for purposes of the transition rule for an ESE with a group health plan year that begins on a date in 2014 other than the first day of the employer’s tax year, an employer with a principal business address in one of the listed counties is not required to begin offering coverage through a SHOP Exchange as of the first day of its plan year that begins in 2014 in order to be treated as offering coverage through a SHOP Exchange for its entire 2014 tax year. Instead, such an employer is required to continue offering health insurance coverage for the plan year that begins in 2014 that would have qualified for a Code Sec. 45R tax credit under the rules applicable before Jan. 1, 2014.

Effective date. Notice 2014-6 is effective as of Dec. 17, 2013, and applies to periods after Dec. 31, 2013.