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IRS Finalizes Regs on Small Employer Health Insurance Tax Credit.
(Parker Tax Publishing July 8, 2014)

The IRS has issued final regulations on the tax credit available for health insurance coverage offered by certain small employers to their employees. T.D. 9672 (6/30/14).

Code Sec. 45R, which was enacted in 2010, provides a health insurance credit to certain eligible small employers. In order to be an eligible small employer, an employer must have in effect a contribution arrangement that meets certain qualifications and must have no more than 25 full-time equivalent employees (FTEs), and the average annual wages of its FTEs must not exceed $50,000 in 2013 ($50,800 in 2014). The credit is phased out when the number of the employer's FTEs exceeds 10 or if average annual wages of its FTEs exceeds $25,000 in 2013 ($25,400 in 2014).

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 tax year under the qualifying arrangement for premiums for qualified health plans (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 (1), above, had enrolled in a QHP which had a premium equal to the average premium for the small group market in the rating area in which the employee enrolls for coverage.

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 (i.e., the uniform percentage requirement). For purposes of Code Sec. 45R, an Exchange refers to a Small Business Health Options Program (SHOP) Exchange.

In 2013, the IRS issued proposed regulations under Code Sec. 45R. Those regulations provided that employers could rely on the proposed regulations for guidance for tax years beginning after 2013 and before 2015. Earlier this week, the IRS issued final regulations, which adopted the provisions of the proposed regulations with certain modifications. The final regulations expand on the proposed regulations' definition of FTEs by providing that leased employees are counted in computing a service recipient's FTEs and average annual wages. In addition, the final regulations 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 provided that if so treated, the former employee is also treated as an employee for purposes of the uniform percentage requirement.

The final regulations also clarify that in calculating an employer's average annual wage limitation, bonuses are included to the extent treated as wages for FICA purposes.

Like the proposed regulations, the final regulations provide that only workers who perform labor or services on a seasonal basis, including retail workers employed exclusively during holiday seasons, meet the definition of a seasonal worker for purposes of the credit. The final regulations further provide that employers may apply a reasonable, good faith interpretation of the term "seasonal worker" and a reasonable good faith interpretation of the applicable provisions that define such workers.

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. The final regulations include a provision that a standalone dental health plan offered through a SHOP Exchange is considered a QHP for purposes of the credit.

With respect to a health reimbursement arrangement (HSA), the final regulations clarify that because an HSA is a self-insured plan, this type of arrangement is not health insurance coverage for purposes of the credit and employer contributions to this type of arrangement are not taken into account for purposes of the credit for any year.

With respect to calculating the uniform percentage that an employer must pay, the final regulations incorporate the uniform percentage requirement provisions from the proposed regulations, but also contain additional rules for how to apply the uniform percentage requirement if SHOP dependent coverage is offered. 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 (including an employee's domestic partner or similar relation, such as a person with whom the employee has entered into a civil union), whether or not a dependent of the participant-employee. SHOP dependent coverage is different than family coverage in that it provides coverage only to the employee's dependents based on allowable rating factors, and does not include the participant-employee. As coverage purchased that does not include the employee, SHOP dependent coverage is not taken into account for purposes of applying the uniformity requirement.

Tobacco usage is an allowable rating factor in the SHOP Exchange that may affect employee premiums. In addition, wellness programs resulting in a premium subsidy are becoming more common. The proposed regulations did not address the impact of a tobacco surcharge or wellness program on the uniform percentage requirement. The final regulations provide that a tobacco surcharge applicable to coverage acquired on a SHOP Exchange and amounts paid by the employer to cover the surcharge are not included in premiums for purposes of calculating the uniform percentage requirement, nor are payments of the surcharge treated as premium payments for purposes of the credit. The final regulations also provide that the uniform percentage requirement 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.

The final regulations provide that, for purposes of meeting the uniform percentage requirement, 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 uniform percentage requirement, whether the difference is due to a discount for participation or a surcharge for nonparticipation. The employer contributions for employees that do not participate in the wellness program must be at least 50 percent 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.

For a discussion of small employers eligible for the health insurance credit, see Parker Tax ¶109,105. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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