IRS Issues Proposed Guidance on Employee Health Insurance Tax Credit

The IRS has released proposed regulations that provide 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 regulations are proposed to be effective the date the final regulations are published in the Federal Register, and apply to tax years beginning after December 31, 2013. To assist with any preparation needed for transition to the requirements applicable to taxable years beginning after December 31, 2014, employers may also rely on these proposed regulations for guidance for tax years beginning after December 31, 2013, and before December 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 January 1, 2015.

Code Sec. 45R offers a tax credit to certain small employers that provide health insurance coverage to their employees. Code Sec. 45R was added by the Patient Protection and Affordable Care Act (P.L. 111-148). 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 Notice 2010- 44, I.R.B. 2010- 22, 717, and Notice 2010-82, I.R.B. 2010-51, 857, 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 QHP 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.