Small employers' health insurance premium tax credit rules proposed.

• Author: Schreiber, Sally P.

The IRS issued proposed regulations governing the Sec. 45R credit for small employers that offer health insurance coverage for employees (REG-113792-13). The proposed rules incorporate the provisions of Notices 2010-44 and 2010-82 (which were issued to provide guidance for employers claiming the credit between its original 2010 effective date and now) as modified to reflect the different statutory rules in effect before 2914 and for 2014 and later. The biggest differences involve the amount of the credit, the fact that employers must obtain the insurance coverage through an exchange, and a new two-year limit on taking the credit.

Mechanics of the Credit

Sec. 45K was added by the Patient Protection and Affordable Care Act, P.L. 111-148. From 2010 to 2013, small businesses--defined as businesses with 25 or fewer employees and average annual wages of less than $50,000--have been eligible for credits of up to 35% of nonelective contributions the businesses make on behalf of their employees for insurance premiums. Tax-exempt organizations have been eligible for a 25% credit against payroll taxes. Beginning in 2014, the maximum credit increases to 50% (and 35% for tax-exempt organizations).

The amount of the credit is based on a percentage of the lesser of: (1) the amount of nonelective contributions paid by the eligible small employer on behalf of employees under a qualifying arrangement during the tax year, and (2) the amount of nonelective contributions the employer would have paid under the arrangement if each employee were enrolled in a plan that had a premium equal to the average premium for the small group market in the rating area in which the employee enrolls for coverage.

Eligible Employers and Employees

The proposed rules provide that employers that are exempt from tax under Sec. 501(a), but not described in Sec. 501(c), are not eligible for the credit, but a Sec. 521 farmers' cooperative that is subject to tax under Sec. 1381 is eligible for the credit as a taxable employer (as long as it meets the other eligibility requirements).

The regulations incorporate the rule that the credit does not require the employees to be performing services in a trade or business. An employer who otherwise meets the eligibility requirements can take the credit for employees who are not performing services in a trade or business, such as a household employee. Eligible small employers located outside the United States that have income effectively...