The Internal Revenue Service has issued a proposed rule that aims to provide guidance on the small business tax credit under the Affordable Care Act (ACA). The ACA added section 45R to the Internal Revenue Code, which offers a tax credit to certain small employers that provide insured health coverage to their employees.
To take advantage of this tax credit, small employers (those with 25 or fewer full-time equivalent employees) must have in place a contribution arrangement through which they can make a non-elective contribution on behalf of each employee who enrolls in a qualified health plan (QHP) offered to employees by the employer. The contribution amount must be at least 50 percent of the QHP’s premium cost. In addition, the average annual wages of the employer’s FTEs cannot currently exceed $50,000. Through 2013, the maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities. For tax years beginning in 2014 or later, the maximum credit will increase to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
The proposed rule adopts and amends prior guidance (Notices 2010-44 and 2010-82) on this small business tax credit. Among other things, Notice 2010-44 addresses the eligibility requirements for employers to claim the credit, provides guidance on how to calculate and claim the credit, and explains the effect on estimated tax, alternative minimum tax, and deductions. Notice 2010-82 expands on Notice 2010-44 and provides additional guidance on determining whether to take into account spouses and leased employees in computing an employer’s FTEs, average annual wages, and premiums paid. The latter notice clarifies that employer contributions to health reimbursement arrangements (HRAs), health flexible spending arrangements (FSAs), and health savings accounts (HSAs) are not taken into account for purposes of the section 45R credit.
The proposed rule addresses each of these issues, and also provides some transition rules if an eligible small employer’s plan year begins on a date other than the first day of its taxable year. According to the proposal, transition rules are needed because in this instance “it may not be practical or possible for the employer to offer insurance to its employees through Small Business Health Options Program (SHOP) Exchange at the beginning of its first taxable year beginning in 2014.”
Comments on the proposal are due on or before November 25, 2013. Written comments should be sent to: CC:PA:LPD:PR (REG-113792-13), Internal Revenue Service, room 5205, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, comments may also be sent electronically through the federal eRulemaking Portal.