Update on ACA’s small employer tax credit


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August 26, 2013 - Update on ACA’s Small Employer Health Care Tax Credit The IRS issued proposed rules late on Friday regarding the ACA’s small employer health care tax credit, which the Federal Register formally published on Monday, August 26, 2013.* Pursuant to the requirements of IRC § 45R (as added by ACA § 1421), the proposed rules note that the IRS will increase the amount of the credit beginning with the 2014 tax year. Employers may qualify for the credit if they meet the following requirements:

  • The employer pays at least 50% of the premium for employee health insurance coverage (under a “qualifying arrangement”);
  • The employer purchases its small group health coverage through the new SHOP exchange marketplaces, which will begin operation in late 2013;
  • The employer has fewer than 25 full-time equivalent employees (FTEs) for the tax year (excluding seasonal employees and certain others);
  • The employer pays average annual wages less than $50,000 per FTE.

The proposed rules offer transition relief to employers whose plan year does not begin on January 1st so that they will be able to claim the credit for the entire year.

Consistent with previous IRS guidance, the proposed rules expressly address the issue of seasonal employees in the preamble, noting that:

“Section 45R(d)(5) and these proposed regulations provide that seasonal employees who work for 120 or fewer days during the taxable year are not considered employees when determining FTEs and average annual wages, but premiums paid on behalf of seasonal workers may be counted in determining the amount of the credit. Seasonal workers include retail workers employed exclusively during holiday seasons and workers employed exclusively during the summer.”

A few other technical points merit mention:

Some higher-income individuals (e.g., owners of sole proprietorships, partners in partnerships, certain shareholders, etc.) are excluded from the calculation of both the number of employees and average wages – making this credit potentially attractive some professional service providers (e.g., small law offices, small medical practices, etc.);

  • The credit is available to employers for two consecutive years – and the employer can carry the credit forward or back to other tax years;
  • The credit is available as a refundable credit to nonprofit employers; and
  • The statute phases out the for employers that have between 10-25 employees and/or that pay average annual wages between $25,000 and $50,000.
While the rules are proposed and not final,

The IRS is likely to default to the approach described in the proposed rules since employers need to make decisions about health coverage for 2014 before the Service will be able to publish the final regulations.

To learn more,

please visit the “credit calculator” at the Tax Advocate Service’s website at http://www.taxpayeradvocate.irs.gov/calculator/SBHCTC.htm. The IRS has also posted FAQs, the form and instructions for claiming the credit, technical guidance, and even a YouTube video about this topic at http://www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit-for-Small-Employers.

* The proposed rules appear at 78 Fed. Reg. 52719 (Aug. 26, 2013), which is available at http://www.gpo.gov/fdsys/pkg/FR-2013-08-26/pdf/2013-20769.pdf.