Small Employer Tax Credit Regulations Now Final

The premium tax credit for small employers has been on the books since the enactment of the Affordable Care Act (ACA) in 2010. But the IRS only recently finalized regulations governing the incentive.

The final regulations took effect on June 30. However, the proposed version of these regulations, published in 2013 and little changed by the final version, pertains to actions by employers from the beginning of this year.

Eligibility and contributions

The small employer tax credit, covered in Internal Revenue Code Section 45R, is available to employers with fewer than 25 full-time equivalent employees (FTEs, as defined by the ACA for the purposes of this credit) that provide health care coverage. Another eligibility limitation is that the average annual wages of the employer’s FTEs must be less than an inflation-adjusted $50,800 in 2014.

Eligible employers must make a nonelective contribution on behalf of each employee who enrolls in a qualified health plan (QHP) that the employer obtained through a Small Business Health Options Program (SHOP). “Transition relief” is available this year for employers based in locations where SHOP plans haven’t been available.

The contribution must be a uniform percentage (not less than 50%) of the cost of the QHP. The size of the tax credit is up to 50% (or 35%, in the case of nonprofits) of the lesser of:

  1. The aggregate amount of nonelective employer contributions, or
  2. The aggregate amount of nonelective contributions the employer would have made if each employee for which a contribution would have been counted “had a premium equal to the average premium [as determined by the government] … for the small group market in the rating area in which the employee enrolls for coverage.”

In other words, the tax credit doesn’t reward employers who pick up at least half of the tab for an above-average health plan. Also, the size of the credit is phased downward to the extent by which the employer’s FTEs exceed 10 and/or FTEs’ average wages exceed an inflation-adjusted $25,400 in 2014. Last, bear in mind that the small employer tax credit can be claimed for only two years (not counting years before 2014), and the years must be consecutive.

The best time

The final regulations provide detailed instructions for how FTE status is determined, treatment of seasonal workers for purposes of the FTE calculation, and other matters. Ask your tax advisor for help determining whether you can claim the credit and, if so, when would be the best time to do so.

© 2014