IRS Proposed Rules Address Small Business Health Care Tax Credit | Practical Law

IRS Proposed Rules Address Small Business Health Care Tax Credit | Practical Law

The Internal Revenue Service (IRS) has published proposed regulations on the small business health care tax credit under the Affordable Care Act (ACA). The proposed regulations, issued under Section 45R of the Internal Revenue Code (IRC), incorporate IRS Notices 2010-44 and 2010-82.

IRS Proposed Rules Address Small Business Health Care Tax Credit

Practical Law Legal Update 9-539-1065 (Approx. 4 pages)

IRS Proposed Rules Address Small Business Health Care Tax Credit

by Practical Law Employee Benefits & Executive Compensation
Published on 27 Aug 2013 • USA (National/Federal)
The Internal Revenue Service (IRS) has published proposed regulations on the small business health care tax credit under the Affordable Care Act (ACA). The proposed regulations, issued under Section 45R of the Internal Revenue Code (IRC), incorporate IRS Notices 2010-44 and 2010-82.
On August 23, 2013, the IRS issued proposed regulations addressing the small business health care tax credit under Section 45R of the Internal Revenue Code (IRC), which was added by the Affordable Care Act (ACA). The proposed regulations generally incorporate the IRS' prior guidance on the tax credit, under Notices 2010-44 and 2010-82, as modified to reflect changes in the statutory rules applicable beginning in 2014 (for more information on the small business health care tax credit, see Practice Note, Small Business Health Care Tax Credit under the ACA).
Under the proposed regulations, a small employer is eligible for the health care tax credit if:
  • It does not have more than 25 full-time equivalent employees (FTEs) for the tax year.
  • These employees have annual average wages of less than $50,000 per FTE (reflecting inflationary adjustments beginning in 2014).
  • The employer has in effect a "qualifying arrangement" under which it must pay a uniform percentage (50% or more) of the premium costs of a qualified health plan (QHP) offered by the employer through the ACA's Small Business Health Options Program (SHOP) Exchange (for a discussion of QHPs under the health insurance exchanges, see Practice Note, Health Insurance Exchanges and Related Requirements under the ACA).
For tax years 2010 to 2013, the maximum credit is:
  • 35% of premiums paid by an eligible small employer.
  • 25% of premiums paid by an eligible small tax-exempt employer.
For tax years beginning in 2014 and after, the maximum tax credit (subject to certain adjustments and limits) is:
  • 50% of premiums paid by an eligible small employer.
  • 35% of premiums paid by an eligible small tax-exempt employer.
Among other issues, the proposed regulations address how to determine which employees are taken into account in calculating the credit, FTEs and average FTE wages, and maximum credit amounts and applicable phaseouts.

Credit Period Limit

For tax years beginning in or after 2014, the "credit period" during which a small employer can receive a Section 45R tax credit is limited to the two-consecutive-tax year period beginning with the first tax year in which the employer offers its employees one or more QHPs through a SHOP exchange. Under the proposed regulations, the first year of this two-consecutive-tax year period is the first year an eligible small employer files:
  • Form 8941 (Credit for Small Employer Health Insurance Premiums), claiming the credit.
  • Form 990-T (Exempt Organization Business Income Tax Return), with an attached Form 8941.
This rule applies even if the employer is only eligible to claim the credit for part of the first year.
The proposed regulations also include rules to prevent the avoidance of the two-year limit on the credit period through the use of successor entities. For purposes of identifying successor entities, the proposed regulations generally apply employment tax rules used to identify successor employers in determining when wages paid by a predecessor are attributed to a successor employer. An entity that would be treated as a successor employer for employment tax purposes will also be treated as a successor employer for purposes of the two-consecutive-tax year credit period under Section 45R. As a result, if the predecessor employer previously claimed the Section 45R credit for a period, that period counts toward the successor employer's two-consecutive tax year credit period.

Transition Guidance

In the preamble to the proposed regulations, the IRS acknowledged that for an eligible small employer whose plan years begin on a date other than the first day of its tax year, it may be difficult for the employer to offer its employees insurance through a SHOP Exchange at the beginning of its first tax year that starts in 2014. As a result, the proposed regulations provide that an employer will be treated as offering coverage through a SHOP Exchange for its entire 2014 tax year, for purposes of eligibility for and calculation of the Section 45R tax credit, if it meets the following three requirements:
  • As of August 26, 2013, the employer offers coverage in a plan year that begins on a date other than the first day of its tax year.
  • 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 January 1, 2014.
  • 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 tax credit will be calculated at the 50% rate (35% rate for tax-exempt eligible small employers) for the entire 2014 tax year.

Effect of State Subsidies

Under the proposed regulations, if an employer is entitled to a state tax credit or premium subsidy that is paid directly to the employer:
  • The amount of employer premiums paid is not reduced for purposes of calculating the tax credit under Section 45R.
  • The tax credit amount cannot be more than the net premiums paid, which equals the employer premiums paid minus the amount of any state tax credits or premium subsidies received.

Practical Impact

Small employers eligible for claiming the Section 45R tax credit will want to become familiar with the proposed regulations, which include some elements from the earlier IRS notices. For example, the regulations provide rules for applying the uniform percentage requirement, under which an employer must generally pay a uniform percentage of the premium for each employee enrolled in a QHP, that was discussed in Notice 2010-82. These rules generally depend on whether:
  • The premium established for the QHP is based on list or composite billing.
  • The QHP offers only self-only coverage, or other coverage (such as family coverage) for which a higher premium is charged.
  • The employer offers one or multiple QHPs.