Small Business Healthcare Tax Credit Expanded
The Internal Revenue Service (IRS) proposed regulations (REG-113792-13) on August 26th concerning the Small Business Healthcare Tax Credit for small employers that offer health insurance coverage to their employees and pay a uniform percentage of at least 50 percent of premiums. This tax credit is available to employers, including nonprofit organizations, with fewer than 25 full-time equivalent (FTE) employees and average annual wages of less than $50,000.
Proposed Rules The proposed rules are consistent with prior guidance (IRS Notices 2010-44 and 2010-82), but reflect changes that become effective in 2014. For example, the credit will be limited to health plans offered through a Small Business Health Options Program (SHOP) Marketplace (aka “Exchange”) after 2013.
The rules for determining which employees are counted, the number of hours of service they perform, the number of FTE employees, and average annual wages are generally unchanged. New guidance is provided on the maximum credit amount allowed, as well as limitations and phase out of the credit, based on the number of FTEs and average wages.
The proposed rules provide transition relief to employers with plan years that are not calendar years, and offer guidance on the requirement to pay a uniform percentage of at least 50 percent of premiums. These regulations will be effective when published in final form, and will apply to 2014 and later years. Comments are requested and must be received by November 25, 2013.
Credit Amount Expanded to 50% Beginning in 2014, the Small Business Healthcare Tax Credit is increased from 35 percent to 50 percent of the amount of aggregate employer contributions to employee health coverage through a SHOP Marketplace (and from 25 percent to 35 percent for nonprofit employers).
The credit will continue to be phased out, based upon the number of FTEs in excess of 10 and average wages exceeding $25,000 (adjusted for inflation). Specifically, the credit is reduced by the sum of: (1) the credit amount multiplied by a fraction, the numerator of which is the number of FTEs in excess of 10 divided by 15, and (2) the credit amount multiplied by a fraction, which is average annual wages over $25,000 (adjusted for inflation) divided by 25,000 (adjusted for inflation). Determine average wages by dividing aggregate wages by the number of the employer’s FTEs and round to the next lowest $1,000.
- An employer with nine FTEs whose average annual wages are $23,000 per FTE pays $72,000 in health insurance premiums. The tax credit is $36,000 (50% x $72,000).
- An employer with 12 FTEs, whose average annual wages are $30,000 per FTE, pays $96,000 in health insurance premiums. The tax credit before any reduction is $48,000 (50% x $96,000).
a.) The reduction for FTEs in excess of 10 is $6,400 ($48,000 x 2/15). b.) The reduction for average annual FTE wages in excess of $25,000 is $9,600 ($48,000 x $5,000/$25,000) c.) The total credit reduction is $16,000 ($6,400 + $9,600), and the employer’s total net tax credit is $32,000 ($48,000 – $16,000).
After 2013, the credit is limited to two consecutive years, beginning with the first year in which the employer (or any predecessor) offers health coverage through a SHOP Marketplace. Prior to 2014, the credit was available for coverage arranged outside of a SHOP Marketplace. Employers who take the tax credit prior to 2014 are still eligible for the credit for two years.
Not All Employees Are Included in Calculating the Tax Credit In general, all employees (determined under the common law standard), who perform services for the employer during the tax year, are taken into account in determining FTEs and average annual wages. However, certain individuals are not considered employees, when calculating the credit. Hours and wages of these individuals are not counted when determining an employer’s eligibility for the credit. For example, independent contractors, sole proprietors and partners are excluded, as are shareholders owning more than two percent of an S corporation; owners of more than five percent of other businesses; and family members of owners and partners, spouses and any persons who are listed as dependents on the individual income tax return of an excluded individual. There are also special rules for seasonal employees who work for 120 or fewer days during the year.
Determining Hours of Service, FTEs, and Average Wages The rules defining hours of service are unchanged. They are generally the same as those that apply to large employers, who are subject to the Affordable Care Act’s Employer Shared Responsibility provisions under Section 4980H. Generally, hours for which an employee is paid, or entitled to payment, for the performance of duties, are counted, as are hours for which the employee is paid for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence. The regulations provide more details, exceptions and methods for calculating hours of service and FTEs, which are generally unchanged from prior guidance.
Average Premium Limitation The credit is limited by the average premium in the small group market in the rating area in which the employee enrolls for coverage through a SHOP Marketplace. For example, if an employer pays 50 percent of the $7,000 premium for its employees (($3,500) – but the average small group market premium in the rating area in which the employees enroll is $6,000 – the employer’s premium payments are limited to 50 percent of $6,000 – i.e., $3,000).
Some individual states offer tax credits to a small employer that provides health insurance to its employees. The credit may also be limited by any state subsidies (i.e., the credit cannot exceed the net premiums paid).
Additionally, the credit is limited for tax-exempt employers to no more than the annual aggregate payroll taxes of the employer, including federal income tax, and the employee and employer shares of the Medicare tax.
Transition Rules If an employer’s plan year is not a calendar year, the employer will be treated as offering coverage through a SHOP Marketplace for 2014 if the employer offers coverage in a plan year other than a calendar year as of August 26, 2013; offers coverage during the period before the first day of the plan year beginning in 2014; and begins offering coverage through a SHOP Marketplace as of the first day of its plan year that begins in 2014. The credit will be calculated at 50 percent (35 percent for nonprofits) for the entire 2014 tax year. In addition, 2014 will be the start of the two consecutive-year credit period.
Uniform Percentage Requirement The regulations require that employers pay a uniform percentage (not less than 50 percent) of premiums for each employee through a SHOP Marketplace. Rules and examples for this requirement discuss the effect of list billing and composite billing, self-only and family coverage, and multiple plans.