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IRS Issues Final Regs on Small Business Health Care Credit

IRS has issued final regs on the Code Sec. 45R tax credit available to certain small employers that offer health insurance coverage to their employees. The final regs affect both taxable and tax-exempt small employers that are or might be eligible for the tax credit. The regs are generally effective on June 30, 2014, although, under a transition rule, employers have the option of applying the provisions in proposed reliance regs that were issued last year. ( T.D. 9672, 06/26/2014; Reg. § 1.45R-1 , Reg. § 1.45R-2, Reg. § 1.45R-3, Reg. § 1.45R-4, Reg. § 1.45R-5 )

Click here for TD 9672, Tax Credit for Employee Health Insurance Expenses of Small Employers.

Background. Under Code Sec. 45R, which was added by the Affordable Care Act (ACA, P.L. 111-148), effective for tax years beginning after December 31, 2009, an eligible small employer (ESE) may claim a tax credit for nonelective contributions to purchase health insurance for its employees. (Code Sec. 45R) An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. (Code Sec. 45R(d)) However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. (Code Sec. 45R(c))

The contributions must be provided under a qualifying arrangement, i.e., one requiring the ESE to make a nonelective contribution, for each employee who enrolls in certain defined qualifying health insurance offered by the ESE, equal to a uniform percentage (not less than 50%) of the premium cost of the qualifying health plan. (Code Sec. 45R(d)(4))

For tax years beginning after 2013, the amount of the small employer health insurance credit for any ESE equals 50% (35% for a tax-exempt ESE) of the lesser of:

1. the aggregate amount of nonelective contributions the employer made on behalf of its employees during the tax year under a contribution arrangement for premiums for qualified health plans offered by the employer to its employees through an exchange, or
2. the aggregate amount of nonelective contributions which the employer would have made during the tax year under the arrangement if each employee taken into account under (1), above, had enrolled in a qualified health plan which had a premium equal to the average premium (as determined by the Secretary of Health and Human Services) for the small group market in the rating area in which the employee enrolls for coverage. (Code Sec. 45R(b))

The credit is reduced for an ESE if:

1. it has more than 10 FTEs but not more than 25 FTEs. The number of FTEs is found by dividing (a) the total hours for which the ESE pays wages to employees during the year (but not more than 2,080 hours for any employee) by (b) 2,080. (Code Sec. 45R(c); Code Sec. 45R(d)(2) ) or
2. average wages per employee are between $25,000 and $50,000. Average annual wages is found by dividing (a) total wages paid to employees during the ESE’s tax year by (b) the number of the FTEs for the year. The result is rounded down to the nearest $1,000 (if not a multiple of $1,000). (Code Sec. 45R(d)(3)(A), Code Sec. 45R(e)(4))

If an ESE has more than 10 FTEs and average annual wages exceed $25,000, the credit reduction is the sum of the amount of the two reductions above. The Code Sec. 45R credit reduces the employer’s Code Sec. 162 deduction for contributions to employees’ health insurance coverage. (Code Sec. 45R(e)(5))

For tax years beginning after 2013, the credit is only available to an ESE that purchases health insurance coverage for its employees through a state exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange. (Code Sec. 45R(e)(2))

Previous guidance. IRS published two notices on Code Sec. 45R that provided guidance that taxpayers could rely on for tax years beginning before January 1, 2014: Notice 2010-44, 2010-22 IRB 717 (see Pension and Benefits Week ¶  2  5/24/2010 ) and Notice 2010-82, 2010-51 IRB 857 (see Pension and Benefits Week ¶  3  12/13/2010).

IRS issued proposed reliance regs on the credit last summer (see Pension and Benefits Week ¶  1  9/3/2013). IRS later issued Notice 2014-6, 2014-2 IRB 279, which provided transition relief for certain small employers that cannot offer a QHP through a SHOP Exchange because the employer’s principal business address is in a particular listed county in which a QHP will not be available through a SHOP Exchange for the 2014 calendar year.

New guidance. The new final regs, which will be covered in greater detail in a forthcoming article:

…generally incorporate the provisions of Notice 2010-44 and Notice 2010-82, as modified to reflect the differences between the statutory provisions applicable to years beginning before 2014 and those applicable to years beginning after 2013;
…provide detailed guidance on how the credit is calculated;
…provide guidance on the application of the “uniform percentage requirement”; and
…retain the rules in the proposed regs for how to claim the credit.

Effective/applicability date. The final regs are effective on June 30, 2014, and applicable for tax years beginning after 2014. Alternatively, employers may rely on the provisions of the proposed regs for tax years beginning after 2013 and before 2015. Transition rules are provided related to certain plan years beginning in 2014.