This is the 39th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This article discusses the proposed regulations (Regulations) recently issued by the Internal Revenue Service (IRS) relating to Section 45R of the Internal Revenue Code, which was added by the Act.

Section 45R provides a tax credit to small employers with no more than 25 full-time equivalent employees who earn less than $50,000 annually. To qualify for taxable years beginning on or after Jan. 1, 2014, the employer must pay at least 50 percent of the premium cost of a qualified health plan purchased through a Small Business Health Options Program (SHOP) operated by a health insurance exchange established under the Act.

For taxable years beginning on or after Jan. 1, 2014, the maximum credit is 50 percent (35 percent for tax-exempt employers) of the premium payments made by employers. The credit phases down if the employer has between 10 and 25 employees. The credit also phases out as average wages exceed $25,000. The credit is available to an employer for only two years.

In the Regulations, the IRS has taken the same approach as for other rules under the Act: Nothing is simple. The Regulations include anti-abuse provisions:

  • Applying the controlled-group rules for tax-qualified retirement plans to determine the number of employees
  • Applying those same controlled-group rules for tax-qualified retirement plans to determine the amount earned by those employees
  • Promising rules to prevent the credit from being taken more than two years by successor employers

The Regulations do provide some employer-friendly rules that also add to the complexity, including:

  • Excluding sole proprietors, partners, 2 percent shareholders in S corporations and family members from the employee count and the average salary determination
  • Excluding seasonal workers who work 120 days or less in a year
  • Use of alternate equivalency methods for calculating hours toward the full-time equivalent employee count

The Department of Health and Human Services previously announced that the SHOP would be only partially operational until 2015 in those states where health insurance exchanges are operated by the federal government. For 2014, a small employer in a state with a federally-facilitated exchange will be able to offer its employees only one health plan through the exchange’s SHOP. By contrast, the SHOP in a state-operated exchange may choose to allow small employers to offer their employees a choice of coverage options in 2014.