IRS Issues Proposed Guidance On Employee Health Insurance Tax Credit Of Small Employers

The Internal Revenue Service has released proposed regulations that provides guidance on the Code Sec. 45R tax credit available to certain small employers offering health insurance coverage to their employees. The proposed regulations affect certain taxable and tax-exempt employers. The proposed regulations were issued in the August 26 Federal Register
The Patient Protection and Affordable Care Act (ACA) created a tax credit for small employers that make nonelective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of its participating employees. In order to be an “eligible small employer,” the employer must have in effect a “qualified contribution arrangement,” 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 Code Sec. 45R(d)(3)(B).

The proposed regulations generally incorporate the provisions of IRS Notice 2010- 44, and Notice 2010-82, but are modified to reflect the differences between the statutory provisions applicable to years before 2014 and those applicable to years after 2013. As in Notices 2010-44 and 2010-82, the proposed regulations use the term “qualifying arrangement” to describe an arrangement under which an eligible small employer 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 percent) of the premium cost of the coverage. The proposed regulations require that, for tax years beginning during or after 2014, the health insurance coverage described in a qualifying arrangement be a qualified health plan offered by an employer to its employees through a SHOP Exchange, except in certain limited circumstances.

The regulations also provide guidance on who is eligible for the credit, calculating the credit, and claiming the credit. Also, the proposed regulations make clear 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.

The proposed regulations are effective the date the final regulations are published in the Federal Register, and apply to tax years beginning after Dec. 31, 2013. To assist with any preparation needed for transition to the requirements applicable to taxable years beginning after Dec. 31, 2014, employers also may rely on these proposed regulations for guidance for tax years beginning after Dec. 31, 2013, and before Dec. 31, 2014. If and to the extent future guidance is more restrictive than the guidance in these proposed regulations, the future guidance will be applied without retroactive effect and employers will be provided with time to come into compliance with the final regulations and will in any case not be required to comply for tax years beginning prior to Jan. 1, 2015, according to the IRS.

Comments requested. Comments and request for a public hearing must be received by Nov. 26, 2013. Submissions should be mailed to: CC:PA:LPD:PR (REG-113792-13), Internal Revenue Service, Room 5205, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044; or sent electronically via the Federal eRulemaking Portal at (IRS113792-13).

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