IRS Issues Final Regulations on Tax Credit for Employee Health Insurance Expenses of Small Employers

Targeted News Service

WASHINGTON, June 30 -- The U.S. Internal Revenue Service published the following rule in the Federal Register:

Tax Credit for Employee Health Insurance Expenses of Small Employers

A Rule by the Internal Revenue Service on 06/30/2014

Publication Date: Monday, June 30, 2014

Agencies: Department of the Treasury

Internal Revenue Service

Entry Type: Rule

Action: Final regulations.

Document Citation: 79 FR 36640

Page: 36640 -36654 (15 pages)

CFR: 26 CFR 1

Agency/Docket Number: TD 9672

RIN: 1545-BL55

Document Number: 2014-15262

Shorter URL: https://federalregister.gov/a/2014-15262

Action

Final Regulations.

Summary

This document contains final regulations on the tax credit available to certain small employers that offer health insurance coverage to their employees. The credit is provided under section 45R of the Internal Revenue Code (Code), enacted by the Patient Protection and Affordable Care Act. These regulations affect small employers, both taxable and tax-exempt that are or might be eligible for the tax credit.

DATES:

Effective date: These regulations are effective on June 30, 2014.

Applicability dates: For dates of applicability, see section 1.45R-5(d).

FOR FURTHER INFORMATION CONTACT:

Stephanie Caden, (202) 317-6846 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 45R of the Code offers a tax credit to certain small employers that provide insured health coverage to their employees. Section 45R was added to the Code by section 1421 of the Patient Protection and Affordable Care Act, enacted March 23, 2010, Public Law 111-148 (as amended by section 10105(e) of the Patient Protection and Affordable Care Act, which was amended by the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029)) (collectively, the "Affordable Care Act").

Section 45R(a) provides a health insurance credit that is available to certain eligible small employers for any taxable year in the credit period. Section 45R(d) provides that in order to be an eligible small employer with respect to any taxable year, an employer must have in effect a contribution arrangement that qualifies under section 45R(d)(4) and must have no more than 25 full-time equivalent employees (FTEs), and the average annual wages of its FTEs must not exceed an amount equal to twice the dollar amount determined under section 45R(d)(3)(B). The amount determined under section 45R(d)(3)(B) is $25,000 (a dollar amount which is adjusted for inflation for taxable years beginning after December 31, 2013, and is $25,400 for taxable years beginning in 2014).

Section 45R(d)(4) provides that a contribution arrangement qualifies if it requires an eligible small employer to make a nonelective contribution on behalf of each employee who enrolls in a qualified health plan (QHP) offered to employees by the employer through an Exchange in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the QHP (referred to in this preamble as the uniform percentage requirement). For purposes of section 45R, an Exchange refers to a Small Business Health Options Program (SHOP) Exchange, established pursuant to section 1311 of the Affordable Care Act and defined in 45 CFR 155.20. For purposes of this preamble and the final regulations, a contribution arrangement that meets these requirements is referred to as a "qualifying arrangement."

Section 45R(b) provides that, subject to the reductions described in section 45R(c), the amount of the credit is equal to 50 percent (35 percent in the case of a tax-exempt eligible small employer) of the lesser of (1) the aggregate amount of nonelective contributions the employer made on behalf of its employees during the taxable year under the qualifying arrangement for premiums for QHPs offered by the employer to its employees through a SHOP Exchange, or (2) the aggregate amount of nonelective contributions the employer would have made during the taxable year under the arrangement if each employee for which a contribution would be taken into account under clause (1) of this sentence had enrolled in a QHP 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.

Section 45R(c) phases out the credit based upon the number of the employer's FTEs in excess of 10 and the amount by which the average annual wages exceeds $25,000 (a dollar amount which is adjusted for inflation for taxable years beginning after December 31, 2013, and is $25,400 for taxable years beginning in 2014). Specifically, section 45R(c) provides that the credit amount determined under section 45R(b) is reduced (but not below zero) by the sum of: (1) The credit amount determined under section 45R(b) multiplied by a fraction, the numerator of which is the total number of FTEs of the employer in excess of 10 and the denominator of which is 15, and (2) the credit amount determined under section 45R(b) multiplied by a fraction, the numerator of which is the average annual wages of the employer in excess of the dollar amount in effect under section 45R(d)(3)(B) and the denominator of which is that dollar amount. Section 45R(d)(3) provides that the average annual wages of an eligible small employer for any taxable year is the amount determined by dividing the aggregate amount of wages that were paid by the employer to employees during the taxable year by the number of FTEs of the employer and rounding that amount to the next lowest multiple of $1,000.

Section 45R(e)(2) provides that for taxable years beginning in or after 2014, the credit period means the two-consecutive-taxable year period beginning with the first taxable year in which the employer (or any predecessor) offers one or more QHPs to its employees through a SHOP Exchange.

For taxable years beginning in 2010, 2011, 2012, and 2013, section 45R(g) provides that the credit is determined without regard to whether the taxable year is in a credit period, and no credit period is treated as beginning with a taxable year beginning before 2014. The maximum amount of the credit for those years is 35 percent (25 percent in the case of a tax-exempt eligible small employer) of an eligible small employer's nonelective contributions for premiums paid for health insurance coverage (within the meaning of section 9832(b)(1)) of an employee. Section 45R(g)(3) provides that an employer does not become ineligible for the tax credit for years beginning prior to 2014 solely because it arranges for the offering of insurance outside of a SHOP Exchange.

In 2010, the Treasury Department and the IRS published two notices addressing the application of section 45R that taxpayers may rely upon for taxable years beginning before 2014: (1) Notice 2010-44 (2010-22 IRB 717 (June 1, 2010)) (addressing the eligibility requirements and how to calculate and claim the credit, and providing transition relief for taxable years beginning in 2010 with respect to qualifying arrangements); and Notice 2010-82 (2010-51 IRB 857 (December 20, 2010)) (expanding guidance on the eligibility requirements, the uniform percentage requirement, and the application of the average premium cap).

On August 26, 2013, the Treasury Department and the IRS released a notice of proposed rulemaking (REG-113792-13, 78 FR 52719) to provide guidance on the application of section 45R for years beginning on or after January 1, 2014. The section of the preamble to these proposed regulations entitled "Proposed Effective/Applicability Dates" provided that employers may rely on the proposed regulations for guidance for taxable years beginning after 2013 and before 2015. Fourteen comments responded to the notice of proposed rulemaking; no public hearing was requested or held. After consideration of all of the comments, these final regulations adopt the provisions of the proposed regulations with certain modifications, the most significant of which are highlighted in the Explanation and Summary of Comments below. All comments are available for public inspection at www.regulations.gov or upon request.

The Treasury Department and the IRS issued Notice 2014-6 (2014-2 IRB 279 (January 6, 2014)), which provides 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.

[*Federal RegisterVJ 2014-06-30]

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