Small Employer Health Insurance Credit Final Regulations Retain Uniform Percentage Rules

The Internal Revenue Service has issued final regulations dealing with the Code Sec. 45R tax credit for certain small employers that provide health coverage to their employees. These final regulations adopt, with certain modifications, proposed regulations that were issued on August 26, 2013. The final regulations were published in the June 30 Federal Register.

The final regulations retain the requirement that an eligible small employer must pay 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 cost of the premium coverage. For tax years beginning on or after Jan. 1, 2014, the insurance must generally be offered through a Small Business Health Options Program (SHOP) Exchange.

No change is made to the transition rule that allows an eligible small employer with a plan year that begins on a date other than the first day of its tax year, to delay offering coverage through a SHOP exchange until the first day of the plan year that begins in 2014. The regulations clarify that such an employer (like other employers) is not required to offer coverage through a SHOP exchange for its 2014 plan year if it has a principal business address in a county that has no qualified health plans available through a SHOP exchange in 2014.

SHOP dependent coverage. The final regulations clarify how the uniform percentage requirement provisions are applied if SHOP dependent coverage is offered. SHOP dependent coverage provides coverage only to an employee’s dependents and not to the employee.

SHOP dependent coverage is not taken into account for purposes of applying the uniformity requirement. Under the final regulations, an employer will not fail to satisfy the uniform percentage requirement by contributing a different amount toward the SHOP dependent coverage than to either employee-only coverage or family coverage, even if no contribution is made for the SHOP dependent coverage or the contribution is different for dependents of different employees or groups of employees. Premiums paid for SHOP dependent coverage may be counted in determining the amount of the credit.

As under the proposed regulations, the uniform percentage requirement may be satisfied by an employer that offers more than one qualified health plan through a SHOP Exchange either on a plan-by-plan basis or by using a reference plan method.

Surcharges and wellness programs. A tobacco surcharge and amounts paid by the employer to cover the surcharge are not included in premiums for purposes of calculating the uniform percentage requirement. The uniform percentage requirement also is applied without regard to an employee’s payment of all or part of the surcharge. Payments of the surcharge also are not treated as premium payments for purposes of the credit.

The difference between an employer’s contribution for an employee participating in a wellness program and the employer contribution for an employee who does not participate 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. However, employer contributions attributable to an employee’s participation in a wellness program are taken into account for purposes of computing the credit.

If an employer’s failure to satisfy the uniform percentage requirement is attributable to additional employer contributions made to particular employees solely to comply with an applicable state or local law, then the employer will be treated as satisfying the requirement. This situation, for example, applies if a state requires that an employee’s contribution not exceed a certain percentage of monthly gross earnings and, as a consequence, the employer’s required contribution for such an employee exceeds 50 percent of the premium.

The final regulations add definitions for “tobacco surcharge” (an additional premium for tobacco users) and “wellness program” (a program promoting health participation which results in a premium discount).

Seasonal employees. Seasonal employees continue to be defined as workers who perform labor or services on a seasonal basis, including retail workers employed exclusively during holiday seasons. The final regulations additionally provide, however, that employers may apply a reasonable, good-faith interpretation of the term seasonal worker.

The final regulations incorporate statutory phase-out provisions that apply to an employer with both more than 10 full-time employees (FTEs) and average annual FTE wages exceeding $25,000 and clarify that a stand-alone dental health plan offered through a SHOP Exchange is considered a qualified health plan for purposes of the credit.

Code Sec. 45R(e)(5)(B) provides that a rule similar to Code Sec. 52(c), which disallows the work opportunity credit to a tax-exempt organization, applies for purpose of the small employer health insurance credit. The final regulations do not apply this rule because Code Sec. 45R(f) specifically provides that a tax-exempt employer may be eligible for the insurance credit.

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