Regs: SEC. 45R SMALL BUSINESS HEALTH CARE CREDIT

Regs: SEC. 45R SMALL BUSINESS HEALTH CARE CREDIT

FINAL REGS ISSUED ON CODE SEC. 45R SMALL BUSINESS HEALTH CARE CREDIT

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
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 largely adopt the proposed reliance Code Sec. 45R regs issued last summer, with certain modifications and additions. The regs are generally effective on June 30, 2014, although, under a transition rule, employers have the option of applying the provisions in the proposed regs for 2014.

Background. For purposes of the general business credit under Code Sec. 38, for an eligible small employer (ESE), the small employer health insurance credit under Code Sec. 45R for any year in the credit period (see below) is the amount determined under Code Sec. 45R(b). Code Sec. 45R, which was added by the Affordable Care Act (ACA, P.L. 111-148), is effective for tax years beginning after Dec. 31, 2009, and allows an ESE to 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 ($50,800 for 2014). (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 ($25,400 for 2014). (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 (the “uniform percentage cap”). (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 (QHPs) 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 (the “average premium cap”). (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 ($25,400 for 2014) and $50,000 ($50,800 for 2014). 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 ($25,400 for 2014), 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))
    Except as modified for tax years beginning in 2010, 2011, 2012, or 2013, the “credit period” is, for any eligible small employer, the two-consecutive-tax year period beginning with the first tax year in which the employer (or any predecessor) offers one or more QHPs to its employees through an Exchange. For tax 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 Small Business Health Options Program (SHOP) 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 Jan. 1, 2014: Notice 2010-44, 2010-22 IRB 717 (see Weekly Alert ¶ 4 05/20/2010 ) and Notice 2010-82, 2010-51 IRB 857 (see Weekly Alert ¶ 2 12/09/2010). In general, Notice 2010-44 addressed the eligibility requirements and how to claim the credit, and provided transition relief for tax years beginning in 2010 with respect to qualifying arrangements; and Notice 2010-82 expanded guidance on the eligibility requirements, the uniform percentage cap requirement, and the application of the average premium cap.
IRS issued proposed reliance regs on the credit last summer (see Weekly Alert ¶ 27 08/29/2013). IRS subsequently 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 (see Weekly Alert ¶ 18 12/19/2013.

New guidance. In general, the final regs adopt the provisions of the proposed regs, with certain modifications as highlighted below.
2010 Notices incorporated, as modified. The final regs generally incorporate the provisions of Notice 2010-44 and Notice 2010-82 (see above), as modified to reflect the differences between the statutory provisions applicable to years beginning before 2014 and those applicable to years beginning after 2013. Such provisions include, among other things, use of the term “qualifying arrangement” to describe an arrangement under which an ESE pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (not less than 50%) of the premium cost of the coverage (Reg. § 1.45R-1(a)(15)), as well as a number of definitions. (Reg. § 1.45R-1(a))

Eligibility for the credit. The final regs define an ESE as an employer that has no more than 25 FTEs for the tax year, whose employees have average annual wages of no more than $50,000 per FTE ($50,800 for 2014), and that has a qualifying arrangement in effect that requires the employer to pay a uniform percentage (not less than 50%) of the premium cost of a QHP offered by the employer to its employees through a SHOP Exchange. (Reg. § 1.45R-2(a)) The regs also define a tax-exempt ESE as an one that is described in Code Sec. 501(c) and that is exempt from tax under Code Sec. 501(a), and provide that all employers treated as a single employer under Code Sec. 414(b), Code Sec. 414(c), Code Sec. 414(m), or Code Sec. 414(o) are treated as a single employer for Code Sec. 45R purposes. (Reg. § 1.45R-2(b))
Under the final regs, employees (determined under the common law standard) who perform services for the employer during the tax year generally are taken into account in determining FTEs and average annual wages. (Reg. § 1.45R-2(c)) FTEs are calculated by computing the total hours of service for the tax year (using one of three allowable methods) and dividing by 2,080 (applying the described rounding conventions). (Reg. § 1.45R-2(d)) Additionally, the final regs provide that premiums paid on behalf of a former employee may be treated as paid on behalf of an employee for purposes of calculating the credit if the former employee is also treated as an employee for purposes of the uniform percentage requirement. (Reg. § 1.45R-1(a)(5)(vii))
For purposes of the credit, the final regs clarify that “wages” are amounts treated as wages under Code Sec. 3121(a) for purposes of FICA, determined without considering the social security wage base limitation. (Reg. § 1.45R-2(f)) The final regs also clarify that seasonal employees who work for 120 or fewer days during the tax year aren’t considered employees when determining FTEs and average annual wages, but premiums paid on their behalf may be counted in determining the amount of the credit.

Calculating the credit. For tax years beginning in or after 2014, the maximum credit for a non-tax-exempt ESE eligible is 50% of the ESE’s premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Exchange. For a tax-exempt ESE for those years, the maximum credit is 35%. (Reg. § 1.45R-3(a)) The final regs also provide the following guidance on the credit:

  • Average premium limitation. The employer’s premium payments are limited by the average premium in the small group market in the rating area in which the employee enrolls for coverage through a SHOP Exchange. The credit is reduced by the excess of the credit calculated using the employer’s premium payments over the credit calculated using the average premium. (Reg. § 1.45R-3(b))
  • Payroll tax limitation. For a tax-exempt ESE, the amount of the credit cannot exceed the amount of the payroll taxes of the employer during the calendar year in which the tax year begins. (Reg. § 1.45R-3(e))
  • Two-consecutive-tax-year credit period limitation. The first year for which an ESE files Form 8941, Credit for Small Employer Health Insurance Premiums, claiming the credit, or files Form 990-T, Exempt Organization Business Income Tax Return, with an attached Form 8941, is the first year of the two-consecutive-tax year credit period under Code Sec. 45R(e)(2). This is so even if the employer is only eligible to claim the credit for part of the first year. (Reg. § 1.45R-3(f))
  • What is taken into account? In general, only premiums paid by the employer for employees enrolled in a QHP offered through a SHOP Exchange are counted when calculating the credit. (Reg. § 1.45R-3(g)) A standalone dental health plan offered through a SHOP Exchange will be considered a QHP for purposes of the credit. The final regs also provide that amounts made available by an employer under, or contributed by an employer to, Health Reimbursement Arrangements (HRAs), health flexible spending arrangements (FSAs), and health savings accounts (HSAs) are not taken into account for purposes of determining premium payments by the employer when calculating the credit.

Transition rules. If an ESE’s plan year begins on a date other than the first day of its tax year, it may not be practical or possible for the employer to offer insurance to its employees through a SHOP Exchange at the beginning of its first tax year beginning in 2014. Thus, the final regs provide that if: (1) as of Aug. 26, 2013, a small employer offers coverage in 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, then it 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 Code Sec. 45R credit. Thus, for an employer that meets these requirements, the credit will be calculated at 50% (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. (Reg. § 1.45R-3(i))

IRS further clarified that for purposes of the transition rule provided in the final regs, 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 counties listed in Notice 2014-6 (i.e., counties in which no QHPs are available through a SHOP Exchange for 2014) 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 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 tax credit under Code Sec. 45R under the rules applicable before 2014, and may calculate the credit by treating such coverage as qualifying.

Uniform percentage requirement (UPR). The final regs incorporate the UPR provisions from the proposed regs, but also provide additional rules for how to apply the requirement if SHOP dependent coverage is offered. The final regs set out rules for applying the UPR based upon whether the premium established for the QHP is based upon list or composite billing; the QHP offers only self-only or other coverage; or the employer offers one or more QHP (below). Composite billing means a system of billing under which a health insurer charges a uniform premium for each of the employer’s employees or charges a single aggregate premium for the group of covered employees that the employer may then divide by the number of covered employees to determine the uniform premium. (Reg. § 1.45R-1(a)(2)) List billing is a billing system under which a health insurer lists a separate premium for each employee based on the age of the employee or other factors. (Reg. § 1.45R-1(a)(10))

  • For an employer offering one QHP under a composite billing system with one level of self-only coverage, the requirement is met if an ESE pays the same amount for each employee enrolled in coverage and that amount is equal to at least 50% of the premium for self-only coverage. (Reg. § 1.45R-4(b)(1))
  • For employers offering one QHP under a composite billing system with different tiers of coverage (e.g., self-only, self plus one, and family coverage) for which different premiums are charged, the requirement is satisfied if the ESE either: (1) pays the same amount for each employee enrolled in that tier of coverage and that amount is equal to at least 50% of the premium for that tier of coverage; or (2) pays an amount for each employee enrolled in a tier of coverage other than employee-only coverage that is the same for all employees and is no less than the amount that the employer would have contributed toward employee-only coverage for that employee (and is equal to at least 50% of the premium for self-only coverage). (Reg. § 1.45R-4(b)(2))
  • For an employer offering one QHP under a list billing system that offers only self-only coverage, the requirement is satisfied if the ESE either: (1) pays an amount equal to a uniform percentage (not less than 50%) of the premium charged for each employee; or (2) determines an “employer computed composite rate” and, if any employee contribution is required, each enrolled employee pays a uniform amount toward the employee-only premium that is no more than 50 percent of the employer-computed composite rate for employee-only coverage. An employer computed composite rate is the average rate determined by adding the premiums for that tier of coverage for all employees eligible to participate in the employer’s health insurance plan (whether or not the eligible employee enrolls in coverage under the plan or in that tier of coverage under the plan) and dividing by the total number of such eligible employees. (Reg. § 1.45R-4(b)(3))
  • For ESEs offering one QHP under list billing with different tiers of coverage for which different premiums are charged, the requirement is satisfied if the ESE either (1) pays an amount for each employee covered under each tier of coverage equal to or exceeding the amount that the employer would have contributed for that employee for employee-only coverage, calculated either based upon the actual premium that the insurer would have charged for that employee-only coverage or the employer-computed composite rate for employee-only coverage; or (2) meets the requirements applicable to employers offering one QHP with employee-only coverage and using list billing described in (1) but substituting the employer-computed composite rate for each tier of coverage for the employer-computed composite rate for employee-only coverage. (Reg. § 1.45R-4(b)(4))
  • If an employer offers more than one QHP through a SHOP Exchange, the UPR may be satisfied in one of two ways: (1) on a plan-by-plan basis, in which the employer’s premium payments for each plan must individually satisfy the above UPR; the amounts or percentages of premiums paid toward each QHP do not have to be the same, but they must each satisfy the UPR if each QHP is tested separately; or (2) through a reference plan method, in which the employer designates one of its QHPs as a reference plan; the employer then either determines a level of employer contributions for each employee—such that, if all eligible employees enrolled in the reference plan, the contributions would satisfy the UPR as applied to that reference plan—or the employer allows each employee to apply the minimum amount of employer contribution determined necessary to meet the UPR toward the reference plan or toward coverage under any other available QHP. (Reg. § 1.45R-4(c))
  • If an employer offers SHOP dependent coverage (below) to employees through the SHOP Exchange, such coverage isn’t taken into account for purposes of applying the uniformity requirement, and an employer won’t fail to satisfy the UPR requirement by contributing a different amount toward that SHOP dependent coverage than to either employee-only coverage or family coverage. However, premiums paid for SHOP dependent coverage may be counted in determining the amount of the credit. “SHOP dependent coverage” is coverage offered separately to any individual who is or may become eligible for coverage under the terms of a group health plan offered through SHOP because of a relationship to a participant-employee, whether or not a dependent of the participant-employee under Code Sec. 152, and it does not include the participant-employee. (Reg. § 1.45R-4(b)(5))
  • If an employer offers more than one QHP through a SHOP Exchange, the UPR may be satisfied either: (1) on a plan-by-plan basis, in which the employer’s premium payments for each plan must individually satisfy the above UPR; the amounts or percentages of premiums paid toward each QHP do not have to be the same, but they must each satisfy the UPR if each QHP is tested separately; or (2) through a reference plan method in which the employer designates one of its QHPs as a reference plan then determines a level of employer contributions for each employee such that, if all eligible employees enrolled in the reference plan, the contributions would satisfy the UPR as applied to that reference plan. (Reg. § 1.45R-4(c))
  • If a tobacco surcharge applies to coverage acquired on a SHOP Exchange, amounts paid by the employer to cover the surcharge are not included in premiums for purposes of calculating the UPR, nor are payments of the surcharge treated as premium payments for purposes of the credit. The final regs also provide that the UPR is applied without regard to employee payment of the tobacco surcharges in cases in which all or part of the employee tobacco surcharges are not paid by the employer. (Reg. § 1.45R-4(d)(i))
  • If the employer implements a wellness program and such program affects the required employee contribution (and thus the employer contribution), for purposes of meeting the UPR, any additional amount of the employer contribution attributable to an employee’s participation in a wellness program over the employer contribution with respect to an employee that does not participate in the wellness program is not taken into account in calculating the UPR. This is true whether the difference is due to a discount for participation or a surcharge for nonparticipation. The employer contributions for non-participating employees must be at least 50% of the premium (including any premium surcharge for nonparticipation). However, for purposes of computing the credit, the employer contributions are taken into account, including those contributions attributable to an employee’s participation in a wellness program. (Reg. § 1.45R-4(d)(ii))
  • The fact that the employer is in a state that requires employers to contribute a certain percentage to an employee’s premium cost, but also requires that the employee’s contribution not exceed a certain percentage of monthly gross earnings, in some instances can result in the employer’s required contribution for a particular employee exceeding 50% of the premium. To satisfy the UPR, the employer generally would be required to increase the employer contribution to all of its employees’ premiums to match the increase for that one employee, which may be difficult, especially if the percentage increase is substantial. Thus, under the final regs, an employer will be treated as meeting the UPR if the failure to satisfy it is attributable to additional employer contributions made to certain employees solely to comply with an applicable State or local law. (Reg. § 1.45R-4(e))

Claiming the credit. Similar to the proposed regs, the final regs prescribe rules for: (i) claiming the credit on the Form 8941, Credit for Small Employer Health Insurance Premiums; (ii) reflecting the credit in estimated tax payments; and (iii) offsetting an ESE’s alternative minimum tax (AMT) liability for the year. In addition, the final regs clarify that no deduction is allowed under Code Sec. 162 for that portion of the premiums paid equal to the amount of the credit claimed under Code Sec. 45R. (Reg. § 1.45R-5)

Effective/applicability date. The final regs are effective on June 30, 2014 and are 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.

References: For small employer health insurance credit, see FTC 2d/FIN ¶ L-15681 ; United States Tax Reporter ¶ 45R4 ; TaxDesk ¶ 384,301 ; TG ¶ 15161