[Federal Register Volume 78, Number 165 (Monday, August 26, 2013)]
[Proposed Rules]
[Pages 52719-52733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-20769]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-113792-13]
RIN 1545-BL55
Tax Credit for Employee Health Insurance Expenses of Small
Employers
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations provide guidance
on the tax credit available to certain small employers that offer
health insurance coverage to their employees under section 45R of the
Internal Revenue Code (Code), enacted by the Patient Protection and
Affordable Care Act. These proposed regulations affect certain taxable
employers and certain tax-exempt employers.
DATES: Comments and request for a public hearing must be received by
November 25, 2013.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-113792-13), Internal
Revenue Service, room 5205, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR
(REG-113792-13), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC, or sent electronically via the
Federal eRulemaking Portal at http:www.regulations.gov (IRS113792-13).
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations,
call Stephanie Caden at (202) 927-9639; concerning submission of
comments, and/or to request a hearing, Oluwafunmilayo Taylor at (202)
622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 45R of the Internal Revenue Code (Code) offers a tax credit
to certain
[[Page 52720]]
small employers that provide insured health coverage to their
employees. Section 45R was added to the Code by section 1421 of the
Patient Protection and Affordable Care Act, enacted March 23, 2010,
Public Law No. 111-148 (as amended by section 10105(e) of the Patient
Protection and Affordable Care Act, which was amended by the Health
Care and Education Reconciliation Act of 2010, Public Law 111-152 (124
Stat. 1029)) (collectively, the ``Affordable Care Act'').
I. Section 45R
Section 45R(a) provides for a health insurance tax credit in the
case of an eligible small employer for any taxable year in the credit
period. Section 45R(d) provides that in order to be an eligible small
employer with respect to any taxable year, an employer must have in
effect a contribution arrangement that qualifies under section
45R(d)(4) and must 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 section
45R(d)(3)(B). The amount determined under section 45R(d)(3)(B) is
$25,000 (as adjusted for inflation for taxable years beginning after
December 31, 2013).
Section 45R(d)(4) states that a contribution arrangement qualifies
if it requires an eligible small employer to make a nonelective
contribution on behalf of each employee who enrolls in a qualified
health plan (QHP) offered to employees by the employer through an
Exchange in an amount equal to a uniform percentage (not less than 50
percent) of the premium cost of the QHP (referred to in this preamble
as the uniform percentage requirement). For purposes of section 45R, an
Exchange refers to a Small Business Health Options Program (SHOP)
Exchange, established pursuant to section 1311 of the Affordable Care
Act and defined in 45 CFR 155.20. For purposes of this preamble and the
proposed regulations, a contribution arrangement that meets these
requirements is referred to as a ``qualifying arrangement.'' See also
the section of this preamble entitled ``Explanation of Provisions.''
Section 45R(b) provides that, subject to the reductions described
in section 45R(c), the amount of the credit is equal to 50 percent (35
percent in the case of a tax-exempt eligible small employer) of the
lesser of: (1) The aggregate amount of nonelective contributions the
employer made on behalf of its employees during the taxable year under
the qualifying arrangement for premiums for QHPs offered by the
employer to its employees through a SHOP Exchange, or (2) the aggregate
amount of nonelective contributions the employer would have made during
the taxable year under the arrangement if each employee taken into
account under: (1) Of this sentence had enrolled in a QHP which had a
premium equal to the average premium (as determined by the Secretary of
Health and Human Services) for the small group market in the rating
area in which the employee enrolls for coverage. Section 45R(c) phases
out the credit based upon the number of the employer's FTEs in excess
of 10 and the amount by which the average annual wages exceeds $25,000
(as adjusted for inflation for taxable years beginning after December
31, 2013 pursuant to section 45R(d)(3)(B)). Specifically, section
45R(c) provides that the credit amount determined under section 45R(b)
is reduced (but not below zero) by the sum of: (1) The credit amount
determined under section 45R(b) multiplied by a fraction, the numerator
of which is the total number of FTEs of the employer in excess of 10
and the denominator of which is 15, and (2) the credit amount
determined under section 45R(b) multiplied by a fraction, the numerator
of which is the average annual wages of the employer in excess of the
dollar amount in effect under section 45R(d)(3)(B) and the denominator
of which is such dollar amount. Section 45R(d)(3) provides that the
average annual wages of an eligible small employer for any taxable year
is the amount determined by dividing the aggregate amount of wages that
were paid by the employer to employees during the taxable year by the
number of FTEs of the employer and rounding such amount to the next
lowest multiple of $1,000.
Section 45R(e)(2) provides that for taxable years beginning in or
after 2014, the credit period means the two-consecutive-taxable year
period beginning with the first taxable year in which the employer (or
any predecessor) offers one or more QHPs to its employees through a
SHOP Exchange.
For taxable years beginning in 2010, 2011, 2012, and 2013, section
45R(g) provides that the credit is determined without regard to whether
the taxable year is in a credit period, and no credit period is treated
as beginning with a taxable year beginning before 2014. The amount of
the credit is 35 percent (25 percent in the case of a tax-exempt
eligible small employer) of an eligible small employer's nonelective
contributions for premiums paid for health insurance coverage (within
the meaning of section 9832(b)(1)) of an employee. Section 45R(g)(3)
provides that an employer does not become ineligible for the tax credit
solely because it arranges for the offering of insurance outside of a
SHOP Exchange.
The Treasury Department and the IRS have published two notices
addressing the application of section 45R. Each notice provides
guidance that taxpayers may rely upon for taxable years beginning
before January 1, 2014. See Notice 2010-44 (2010-22 IRB 717 (June 10,
2010)) and Notice 2010-82 (2010-51 IRB 857 (December 20, 2010)). Notice
2010-44 also provided transition relief for taxable years beginning in
2010 with respect to the requirements for a qualifying arrangement
under section 45R.
II. Notice 2010-44
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. The notice specifically describes the
rules for how employees are taken into account in determining an
employer's FTEs, average wages, and premiums paid, with certain
individuals excluded and with employees of certain related employers
included.
III. Notice 2010-82
Notice 2010-82 expands on the guidance provided in Notice 2010-44
and provides additional guidance on determining whether to take into
account spouses and leased employees (as defined in section 414(n)) in
computing an employer's FTEs, average annual wages, and premiums paid.
The notice provides 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 notice further explains the requirement
that an eligible small employer must pay a uniform percentage (not less
than 50 percent) of the premium for each employee enrolled in health
insurance coverage offered by the employer. The notice provides rules
for applying the uniform percentage requirement in taxable years
beginning after December 31, 2009 and prior to 2014, and further
provides that for taxable years beginning in 2010, an employer may
satisfy the uniform percentage requirement either by meeting the
requirements provided in Notice 2010-82 or by meeting the transition
relief rules provided in Notice 2010-44. With respect to calculating
the credit, the notice provides guidance on
[[Page 52721]]
small group markets, taxpayers with employees in multiple States, the
application of the average premium cap, and taxpayers with fiscal
taxable years.
Explanation of Provisions
These proposed regulations generally incorporate the provisions of
Notice 2010-44 and Notice 2010-82 as 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, these 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. Section 45R(d)(4) and these 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 (but
see section II.I of this preamble for a description of certain
transition guidance for 2014).
I. Eligibility for the Credit
A. Eligible Small Employer Defined
Section 45R and these proposed regulations provide that an eligible
small employer is defined as an employer that has no more than 25 FTEs
for the taxable year, whose employees have average annual wages of less
than $50,000 per FTE (as adjusted for inflation for years after
December 31, 2013), and that has a qualifying arrangement in effect
that requires the employer to pay a uniform percentage (not less than
50 percent) of the premium cost of a QHP offered by the employer to its
employees through a SHOP Exchange. A tax-exempt eligible small employer
is an eligible small employer that is described in section 501(c) and
that is exempt from tax under section 501(a). An employer that is an
agency or instrumentality of the Federal government, or of a State,
local or Indian tribal government, is not an eligible small employer
for purposes of section 45R unless it is an organization described in
section 501(a) (and otherwise meets the requirements for an eligible
small employer). However, a farmers' cooperative described in section
521 that is subject to tax pursuant to section 1381 and otherwise meets
the requirements of this section is an eligible small employer.
Section 45R does not require that, in order for an employer to be
an eligible small employer, the employees perform services in a trade
or business. Thus, an employer that otherwise meets the requirements
for the section 45R credit does not fail to be an eligible small
employer merely because the employees of the employer are not
performing services in a trade or business. For example, a household
employer that otherwise satisfies the requirements of section 45R is an
eligible small employer for purposes of the credit.
An employer located outside the United States (including a U.S.
Territory) may be an eligible small employer if the employer has income
effectively connected with the conduct of a trade or business in the
United States, otherwise meets the requirements of this section and is
able to offer a QHP to its employees through a SHOP Exchange.
B. Application of Section 414 Aggregation Rules
In accordance with section 45R(e)(5), these proposed regulations
provide that all employers treated as a single employer under section
414(b), (c), (m), or (o) are treated as a single employer for purposes
of section 45R. Thus, for example, all employees of the employers
treated as a single employer are counted in computing the single
employer's FTEs and average annual wages. This applies to employers
that are corporations in a controlled group of corporations, employers
that are members of an affiliated service group, and employers that are
partnerships, sole proprietorships, etc. under common control under
section 414(c). Section 414 also applies to tax-exempt eligible small
employers under common control. See Sec. 1.414(c)-5.
C. Determining Employees Taken Into Account
The proposed rules for determining employees taken into account are
the same as those in the previous notices. In general, all employees
(determined under the common law standard) who perform services for the
employer during the taxable year are taken into account in determining
FTEs and average annual wages, including those who are not performing
services in the employer's trade or business. (But see special rules
for seasonal employees described in this section of the preamble.)
However, section 45R and these proposed regulations provide that
certain individuals are not considered employees when calculating the
credit, and hours and wages of these individuals are not counted when
determining an employer's eligibility for the credit. The following
individuals are not employees or are otherwise excluded for this
purpose: independent contractors (including sole proprietors); partners
in a partnership; shareholders owning more than two percent of an S
corporation; owners of more than five percent of other businesses;
family members of these owners and partners, including a child (or
descendant of a child), a sibling or step sibling, a parent (or
ancestor of a parent), a step-parent, a niece or nephew, an aunt or
uncle, or a son-in-law, daughter-in-law, father-in-law, mother-in-law,
brother-in-law, or a sister-in-law. A spouse is also considered a
family member for this purpose, as is a member of the household who is
not a family member but qualifies as a dependent on the individual
income tax return of an excluded individual.
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.
Compensation paid to a minister performing services in the exercise
of his or her ministry generally is subject to tax under the Self-
Employment Contributions Act (SECA) and not under the Federal Insurance
Contributions Act (FICA), whether the minister is an employee or self-
employed under the common law. See sections 1402(c)(2)(d), 1402(c)(4),
and 3121(b)(8)(A). For purposes of income taxes generally, including
the credit under section 45R, whether a minister is an employee is
determined under the common law standard for determining worker status.
If under the common law a minister is not an employee, the minister is
not taken into account in determining an employer's FTEs. If under the
common law a minister is an employee, the minister is taken into
account in determining an employer's FTEs. However, because a minister
performing services in the exercise of his or her ministry is treated
as not engaged in employment for purposes of FICA, compensation paid to
a minister is not wages as defined under section 3121(a), and so is not
included for purposes of computing an employer's average annual wages.
[[Page 52722]]
D. Determining Hours of Service
These proposed regulations provide that an employee's hours of
service for a year include hours for which the employee is paid, or
entitled to payment, for the performance of duties for the employer
during the employer's taxable year. Hours of service also include hours
for which the employee is paid for vacation, holiday, illness,
incapacity (including disability), layoff, jury duty, military duty, or
leave of absence. Hours of service do not include the hours of seasonal
employees who work for 120 or fewer days during the taxable year, nor
do they include hours worked for a year in excess of 2,080 for a single
employee.
These proposed regulations describe three methods for calculating
the total number of hours of service for a single employee for the
taxable year: actual hours worked; days-worked equivalency; and weeks-
worked equivalency. Employers need not use the same method for all
employees and may apply different methods for different classifications
of employees if the classifications are reasonable and consistently
applied. For example, an employer may use the actual hours worked
method for all hourly employees and the weeks-worked equivalency method
for all salaried employees. These proposed rules are the same as those
in the previous notices.
E. Determining FTEs
In accordance with section 45R(d)(2), these proposed regulations
provide that FTEs are calculated by computing the total hours of
service for the taxable year using a method described in section 1.D of
this preamble, and dividing the total hours of service by 2,080. If the
result is not a whole number (0, 1, 2, etc.), the result is rounded
down to the next lowest whole number. The only exception to this rule
is when the result is less than one; in this case, the employer rounds
up to one FTE. In some circumstances, an employer with 25 or more
employees may qualify for the credit if some of its employees work less
than full-time. For example, an employer with 46 employees that each
are paid wages for 1,040 hours per year has 23 FTEs and, therefore, may
qualify for the credit. These proposed rules are the same as those in
the previous notices.
F. Determining Average Annual FTE Wages
In accordance with section 45R(e)(4), these proposed regulations
define wages, for purposes of the credit, as wages defined under
section 3121(a) for purposes of FICA, determined without considering
the social security wage base limitation. To calculate average annual
FTE wages, an employer must figure the total wages paid during the
taxable year to all employees, divide the total wages paid by the
number of FTEs, and if the result is not a multiple of $1,000, round
the result to the next lowest multiple of $1,000. For example, $30,699
is rounded down to $30,000. But see special rules for seasonal
employees described in section I.C of this preamble. These proposed
rules are the same as those in the previous notices.
II. Calculating the Credit
A. Maximum Credit
Under section 45R and these proposed regulations, for taxable years
beginning during or after 2014, the maximum credit for an eligible
small employer other than a tax-exempt eligible small employer is 50
percent of the eligible small employer's premium payments made on
behalf of its employees under a qualifying arrangement for QHPs offered
through a SHOP Exchange. For a tax-exempt eligible small employer for
those years, the maximum credit is 35 percent. The employer's tax
credit is subject to several adjustments and limitations as set forth
in this preamble.
B. Average Premium Limitation
Under section 45R and these proposed regulations, for purposes of
calculating the credit for taxable years beginning after 2013, the
employer's premium payments are limited by the average premium in the
small group market in the rating area in which the employee enrolls for
coverage through a SHOP Exchange. The credit will be reduced by the
excess of the credit calculated using the employer's premium payments
over the credit calculated using the average premium. For example, if
an employer pays 50 percent of the $7,000 premium for family coverage
for its employees ($3,500), but the average premium for family coverage
in the small group market in the rating area in which the employees
enroll is $6,000, for purposes of calculating the credit the employer's
premium payments are limited to 50 percent of $6,000 ($3,000).
C. Credit Phaseout
Under section 45R and these proposed regulations, the credit phases
out for eligible small employers if the number of FTEs exceeds 10, or
if the average annual wages for FTEs exceed $25,000 (as adjusted for
inflation for taxable years beginning after December 31, 2013). For an
employer with both more than 10 FTEs and average annual FTE wages
exceeding $25,000, the credit will be reduced based on the sum of the
two reductions. This may reduce the credit to zero for some employers
with fewer than 25 FTEs and average annual FTE wages of less than
double the $25,000 dollar amount (as adjusted for inflation).
D. State Subsidy and Tax Credit Limitation
Some States offer tax credits to a small employer that provides
health insurance to its employees. Some of these credits are refundable
credits and others are nonrefundable credits. In addition, some States
offer premium subsidy programs for certain small employers under which
the State makes a payment equal to a portion of the employees' health
insurance premiums. Generally, the State pays this premium subsidy
either directly to the employer or to the employer's insurance company
(or another entity licensed under State law to engage in the business
of insurance).
Under these proposed regulations, and consistent with previous
notices, if the employer is entitled to a State tax credit or premium
subsidy that is paid directly to the employer, the amount of employer
premiums paid is not reduced for purposes of calculating the section
45R credit, but the amount of the credit cannot exceed the net premiums
paid, which are the employer premiums paid minus the amount of any
State tax credits or premium subsidies received. If a State makes
premium payments directly to the insurance company, the State is
treated as making these payments on behalf of the employer for purposes
of determining whether the employer has satisfied the ``qualifying
arrangement'' requirement to pay an amount equal to a uniform
percentage (not less than 50 percent) of the premium cost of coverage.
Also, these premium payments by the State are treated as an employer
contribution under section 45R for purposes of calculating the credit,
but the amount of the credit cannot exceed the premiums actually paid
by the employer. Finally, if a State-administered program, such as
Medicaid, makes payments on behalf of individuals and their families
who meet certain eligibility requirements, these payments do not reduce
the amount of employer premiums paid for purposes of calculating the
credit.
[[Page 52723]]
E. Payroll Tax Limitation for Tax-Exempt Employers
Section 45R and these proposed regulations define the term
``payroll taxes'' as (1) amounts required to be withheld under section
3402 \1\ and (2) the employee's and employer's shares of Medicare tax
required to be withheld and paid under sections 3101(b) and 3111(b) on
employees' wages for the year. For a tax-exempt eligible small
employer, the amount of the credit cannot exceed the amount of the
payroll taxes of the employer during the calendar year in which the
taxable year begins.
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\1\ Although section 45R(f)(3)(A)(i) cites to section 3401(a)(1)
as imposing the obligation on employers to withhold income tax from
employees, it is actually section 3402 that imposes the withholding
obligation. We have cited to section 3402 throughout this preamble
and in the proposed regulation.
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F. Two-Consecutive-Taxable Year Credit Period Limitation
These proposed regulations provide that the first year for which an
eligible small employer files Form 8941, ``Credit for Small Employer
Health Insurance Premiums,'' claiming the credit, or files Form 990-T,
``Exempt Organization Business Income Tax Return,'' with an attached
Form 8941, is the first year of the two-consecutive-taxable year credit
period. Even if the employer is only eligible to claim the credit for
part of the first year, the filing of Form 8941 begins the first year
of the two-consecutive-taxable year credit period. For application of
the two-consecutive-taxable year credit period under the transition
relief related to taxable years beginning in 2014, see Sec. 1.45R-3(i)
of these proposed regulations and section II.I of the Explanation of
Provisions section of this preamble.
Section 45R(i) provides that regulations shall be prescribed as
necessary to prevent the avoidance of the two-year limit on the credit
period through the use of successor entities and the avoidance of the
credit phaseout limitations through the use of multiple entities. For
purposes of identifying successor entities, these proposed regulations
generally apply the rules for identifying successor employers
applicable under the employment tax provisions for determining when
wages paid by a predecessor may be attributed to a successor employer
(see Sec. 31.3121(a)(1)-1(b)). Accordingly, under the proposed
regulations, an entity that would be treated as a successor employer
for employment tax purposes will also be treated as a successor
employer for purposes of the two-consecutive-taxable year credit period
under section 45R. Therefore, if the predecessor employer had
previously claimed the credit under section 45R for a period, that
period will count towards the successor employer's two-consecutive-
taxable year credit period.
G. Premium Payments by the Employer
In general, only premiums paid by the employer for employees
enrolled in a QHP offered through a SHOP Exchange are counted when
calculating the credit.\2\ If the employer pays a portion of the
premiums and the employees pay the rest, only the portion paid by the
employer is taken into account. For this purpose, any premium paid
through a salary reduction arrangement under a section 125 cafeteria
plan is not treated as an employer-paid premium. Premiums paid with
employer-provided flex credits that employees may elect to receive as
cash or as a taxable benefit are treated as paid pursuant to a salary
reduction arrangement under a section 125 cafeteria plan. See Notice
2012-40 (2012-26 IRB 1046 (June 25, 2012)). The proposed regulations
further provide that amounts made available by an employer under or
contributed by an employer to HRAs, FSAs and HSAs are not taken into
account for purposes of determining premium payments by the employer.
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\2\ In general a stand-alone dental health plan will be
considered a qualifed health plan. Patient Protection and Affordable
Care Act; Establishment of Exchanges and Qualified Health Plans;
Exchange Standards for Employers, 77 Fed. Reg. 18310, 18315 (March
27, 2012).
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The proposed regulations provide that if a minister is a common law
employee and is taken into account in an employer's FTEs, the premiums
paid by the employer for health insurance may be counted in calculating
the credit.
A leased employee is defined in section 414(n)(2) as a person who
is not an employee of the service recipient and who provides services
to the service recipient pursuant to an agreement with the leasing
organization. The person must have performed services for the service
recipient on a substantially full-time basis for a period of at least
one year under the primary direction and control of the service
recipient. Leased employees are counted in computing a service
recipient's FTEs and average annual wages. See section 45R(e)(1)(B).
See section II.I of this preamble for special rules related to
taxable years beginning in 2014.
H. Trusts, Estates, Regulated Investment Companies, Real Estate
Investment Trusts and Cooperative Organizations
Section 45R(e)(5)(B) provides that rules similar to the rules of
section 52(c), (d) and (e) will apply. Because section 45R(f)
explicitly provides that a tax-exempt eligible small employer may be
eligible for the credit, these proposed regulations do not adopt a rule
similar to section 52(c). However, these proposed regulations provide
that rules similar to the rules of section 52(d) and (e) and the
regulations thereunder apply in calculating and apportioning the credit
with respect to trusts, estates, regulated investment companies, real
estate investment trusts, and cooperative organizations.
I. Transition Rules
If an eligible small employer's plan year begins on a date other
than the first day of its taxable year, it may not be practical or
possible for the employer to offer insurance to its employees through a
SHOP Exchange at the beginning of its first taxable year beginning in
2014. These proposed regulations provide that if: (1) As of August 26,
2013, a small employer offers coverage in a plan year that begins on a
date other than the first day of its taxable year, (2) the employer
offers coverage during the period before the first day of the plan year
beginning in 2014 that would have qualified the employer for the credit
under the rules otherwise applicable to the period before January 1,
2014, and (3) the employer begins offering coverage through a SHOP
Exchange as of the first day of its plan year that begins in 2014, then
it will be treated as offering coverage through a SHOP Exchange for its
entire 2014 taxable year for purposes of eligibility for, and
calculation of, a credit under section 45R. Thus, for an employer that
meets these requirements, the credit will be calculated at the 50
percent rate (35 percent rate for tax-exempt eligible small employers)
for the entire 2014 taxable year and the 2014 taxable year will be the
start of the two-consecutive-taxable year credit period.
III. Application of Uniform Percentage Requirement
A. Uniform Premium
Section 45R and these proposed regulations require that to be
eligible for the credit, an eligible small employer must generally pay
a uniform percentage (not less than 50 percent) of the premium for each
employee enrolled in a QHP offered to its employees through a SHOP
Exchange. These proposed regulations set forth rules for applying this
requirement in
[[Page 52724]]
separate situations depending upon (1) whether the premium established
for the QHP is based upon list billing or is based upon composite
billing, (2) whether the QHP offers only self-only coverage, or other
coverage (such as family coverage) for which a higher premium is
charged, and (3) whether the employer offers one QHP or more than one
QHP. The uniform percentage rule applies only to the employees offered
coverage and does not impose a coverage requirement.
B. Composite Billing and List Billing
These proposed regulations define the term ``composite billing'' to
mean a system of billing under which a health insurer charges a uniform
premium for each of the employer's employees or charges a single
aggregate premium for the group of covered employees that the employer
may then divide by the number of covered employees to determine the
uniform premium. In contrast, the term ``list billing'' is defined as a
billing system under which a health insurer lists a separate premium
for each employee based on the age of the employee or other factors.
C. Employers Offering One QHP
For an employer offering one QHP under a composite billing system
with one level of self-only coverage, these proposed regulations
provide that the uniform percentage requirement is met if an eligible
small employer pays the same amount for each employee enrolled in
coverage and that amount is equal to at least 50 percent of the premium
for self-only coverage. For employers offering one QHP under a
composite billing system with different tiers of coverage (for example,
self-only, self plus one, and family coverage) for which different
premiums are charged, the uniform percentage requirement is satisfied
if the eligible small employer either: (1) Pays the same amount for
each employee enrolled in that tier of coverage and that amount is
equal to at least 50 percent of the premium for that tier of coverage,
or (2) pays an amount for each employee enrolled in the more expensive
tiers of coverage that is the same for all employees and is no less
than the amount that the employer would have contributed toward self-
only coverage for that employee (and is equal to at least 50 percent of
the premium for self-only coverage).
For an employer offering one QHP under a list billing system that
offers only self-only coverage, the uniform percentage requirement is
satisfied if the eligible small employer either: (1) Pays an amount
equal to a uniform percentage (not less than 50 percent) of the premium
charged for each employee, or (2) determines an ``employer-computed
composite rate'' and, if any employee contribution is required, each
enrolled employee pays a uniform amount toward the self-only premium
that is no more than 50 percent of the employer-computed composite rate
for self-only coverage. The proposed regulations define ``employer-
computed composite rate'' as the average rate determined by adding the
premiums for that tier of coverage for all employees eligible to
participate in the employer's health insurance plan (whether or not the
eligible employee enrolls in coverage under the plan or in that tier of
coverage under the plan) and dividing by the total number of such
eligible employees.
For eligible small employers offering one QHP under list billing
with different tiers of coverage for which different premiums are
charged, the uniform percentage requirement is satisfied if the
eligible small employer pays toward the premium for each employee
covered under each tier of coverage an amount equal to or exceeding the
amount the employer would have contributed with respect to that
employee for self-only coverage, calculated either based on the actual
premium that would have been charged by the insurer for that employee
for self-only coverage, or based on the employer-computed composite
rate for self-only coverage, and the employer premium payments within
the same tier are uniform in percentage or amount. Alternatively, the
eligible small employer may satisfy the uniform percentage requirement
by meeting the uniform percentage requirement separately for each tier
of coverage and substituting the employer-computed composite rate for
that tier of coverage for the employer-computed composite rate for
self-only coverage.
The proposed regulations provide examples of how the uniform
percentage requirement is applied in all of these situations.
D. Employers Offering More Than One Plan
As set forth in these proposed regulations, if an employer offers
more than one QHP through a SHOP Exchange, the uniform percentage
requirement may be satisfied in one of two ways. The first is on a
plan-by-plan basis, meaning that the employer's premium payments for
each plan must individually satisfy the uniform percentage requirement
stated above. The amounts or percentages of premiums paid toward each
QHP do not have to be the same, but they must each satisfy the uniform
percentage requirement if each QHP is tested separately. The other
permissible method to satisfy the uniform percentage requirement is
through the reference plan method. Under the reference plan method, the
employer designates one of its QHPs as a reference plan. Then the
employer either determines a level of employer contributions for each
employee such that, if all eligible employees enrolled in the reference
plan, the contributions would satisfy the uniform percentage
requirement as applied to that reference plan, or the employer allows
each employee to apply the minimum amount of employer contribution
determined necessary to meet the uniform percentage requirement toward
the reference plan or toward coverage under any other available QHP.
E. Employers Complying With State Law
The Treasury Department and the IRS understand that at least one
State requires employers to contribute a certain percentage (50%) to an
employee's premium cost, but also requires that the employee's
contribution not exceed a certain percentage of monthly gross earnings
so that, in some instances, the employer's required contribution for a
particular employee may exceed 50 percent of the premium.\3\ To satisfy
the uniform percentage requirement under section 45R, that employer
generally would be required to increase the employer contribution to
all its employees' premiums to match the increase for that one
employee, which may be difficult especially if the percentage increase
is substantial. Accordingly, for taxable years beginning in 2014, an
employer will be treated as meeting the uniform percentage requirement
if the failure to satisfy the uniform percentage requirement is
attributable to additional employer contributions made to certain
employees solely to comply with an applicable State or local law.
---------------------------------------------------------------------------
\3\ See Hawaii Prepaid Health Care Act, Hawaii Revised Statutes
Chapter 393 (1974).
---------------------------------------------------------------------------
IV. Claiming the Credit
A. Form 8941, Credit for Small Employer Health Insurance Premiums
For an eligible small employer that is not a tax-exempt eligible
small employer, the credit is calculated on Form 8941, ``Credit for
Small Employer Health Insurance Premiums,'' and can be applied against
both regular and alternative minimum tax. For tax-exempt eligible small
employers, the credit is also calculated on Form 8941
[[Page 52725]]
and attached to Form 990-T, ``Exempt Organization Business Income Tax
Return.'' Filing Form 990-T with an attached Form 8941 is required for
a tax-exempt eligible small employer to claim the credit, even if it is
not otherwise required to file Form 990-T.
B. Estimated Tax Payments and Alternative Minimum Tax (AMT) Liability
These proposed regulations provide that the section 45R credit may
be reflected in an eligible small employer's estimated tax payments in
accordance with the estimated tax rules. The credit can also be used to
offset an eligible small employer's AMT liability for the year, subject
to certain limitations based on the amount of an employer's regular tax
liability, AMT liability and other allowable credits. See section
38(c)(1), as modified by section 38(c)(4)(B)(vi), for these
limitations.
C. Reduced Section 162 Deduction
No deduction is allowed under section 162 for that portion of the
premiums paid equal to the amount of the credit claimed under section
45R. See section 280C(h).
Proposed Effective/Applicability Dates
These regulations are proposed to be effective the date the final
regulations are published in the Federal Register, and apply to taxable
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 taxable 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 taxable years beginning prior to January 1, 2015).
Availability of IRS Documents
IRS notices cited in this preamble are made available by the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations.
It is hereby certified that this regulation will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required. While
the number of small entities affected is substantial, the economic
impact on the affected small entities is not significant. The
information required to determine a small employer's eligibility for,
and amount of, an applicable credit, generally consisting of the annual
hours worked by its employees, the annual wages paid to its employees,
the cost of the employees' premiums for qualified health plans and the
employer's contribution towards those premiums, is information that the
small employer generally will retain for business purposes and be
readily available to accumulate for purposes of completing the
necessary form for claiming the credit. In addition, this credit is
available to any eligible small employer only twice (because the credit
can be claimed by a small employer only for two consecutive taxable
years beginning after December 31, 2013, beginning with the taxable
year for which the small employer first claims the credit).
Accordingly, no small employer will calculate the credit amount or
complete the process for claiming the credit under this regulation more
than two times.
Based on these facts, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are timely submitted
to the IRS as prescribed in this preamble under the ``Addresses''
heading. The IRS and the Treasury Department request comments on all
aspects of the proposed rules. All comments will be available at
www.regulations.gov or upon request. A public hearing will be scheduled
if requested in writing by any person that timely submits written or
electronic comments. If a public hearing is scheduled, notice of the
date, time, and place for the hearing will be published in the Federal
Register.
Drafting Information
The principal author of these proposed regulations is Stephanie
Caden, Office of the Division Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). However, other personnel from the IRS
and the Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART I--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read as
follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.45R-0 is added to read as follows:
Sec. 1.45R-0 Table of Contents
This section lists the table of contents for Sec. Sec. 1.45R-1
through 1.45R-5.
Sec. 1.45R-1 Definitions.
(a) Definitions.
(1) Average premium.
(2) Composite billing.
(3) Credit period.
(4) Eligible small employer.
(5) Employee.
(6) Employer-computed composite rate.
(7) Exchange.
(8) Family member.
(9) Full-time equivalent employee (FTE).
(10) List billing.
(11) Net premium payments.
(12) Nonelective contribution.
(13) Payroll taxes.
(14) Qualified health plan QHP.
(15) Qualifying arrangement.
(16) Seasonal worker.
(17) Small Business Health Options Program (SHOP).
(18) State.
(19) Tax-exempt eligible small employer.
(20) Tier.
(21) United States.
(22) Wages.
(b) Effective/applicability date.
Sec. 1.45R-2 Eligibility for the credit.
(a) Eligible small employer.
(b) Application of section 414 employer aggregation rules.
(c) Employees taken into account.
(d) Determining the hours of service performed by employees.
(1) In general.
(2) Permissible methods.
(3) Examples.
(e) FTE calculation.
(1) In general.
(2) Example.
[[Page 52726]]
(f) Determining the employer's average annual wages.
(1) In general.
(2) Example.
(g) Effective/applicability date.
Sec. 1.45R-3 Calculating the credit.
(a) In general.
(b) Average premium limitation.
(1) In general.
(2) Examples.
(c) Credit phaseout.
(1) In general.
(2) $25,000 dollar amount adjusted for inflation.
(3) Examples
(d) State credits and subsidies for health insurance.
(1) Payments to employer.
(2) Payments to issuer.
(3) Credits may not exceed net premium payment.
(4) Examples.
(e) Payroll tax limitation for tax-exempt eligible small
employers.
(1) In general.
(2) Example.
(f) Two-consecutive-taxable year credit period limitation.
(g) Premium payments by the employer for a taxable year.
(1) In general.
(2) Excluded amounts.
(h) Rules applicable to trusts, estates, regulated investment
companies, real estate investment trusts and cooperative
organizations.
(i) Transition rule for 2014.
(1) In general.
(2) Example.
(j) Effective/applicability date.
Sec. 1.45R-4 Uniform percentage of premium paid.
(a) In general.
(b) Employers offering one QHP.
(1) Employers offering one QHP, self-only coverage, composite
billing.
(2) Employers offering one QHP, other tiers of coverage,
composite billing.
(3) Employers offering one QHP, self-only coverage, list
billing.
(4) Employers offering one QHP, other tiers of coverage, list
billing.
(c) Employers offering more than one QHP.
(1) QHP-by-QHP method.
(2) Reference QHP method.
(d) Special rules regarding employer compliance with applicable
State and local law.
(e) Examples.
(f) Effective/applicability date.
Sec. 1.45R-5 Claiming the credit.
(a) Claiming the credit.
(b) Estimated tax payments and alternative minimum tax (AMT)
liability.
(c) Reduction of section 162 deduction.
(d) Effective/applicability date.
0
Par. 3. Sections 1.45R-1, 1.45R-2, 1.45R-3, 1.45R-4 and 1.45R-5 are
added to read as follows:
Sec. 1.45R-1 Definitions.
(a) Definitions. The definitions in this section apply to this
section and Sec. Sec. 1.45R-2, 1.45R-3, 1.45R-4, and 1.45R-5.
(1) Average premium. The term average premium means an average
premium for the small group market in the rating area in which the
employee enrolls for coverage. The average premium for the small group
market in a rating area is determined by the Secretary of Health and
Human Services.
(2) Composite billing. The term composite billing means a system of
billing under which a health insurer charges a uniform premium for each
of the employer's employees or charges a single aggregate premium for
the group of covered employees that the employer then divides by the
number of covered employees to determine the uniform premium.
(3) Credit period--(i) In general. The term credit period means,
with respect to any eligible small employer (or any predecessor
employer), the two-consecutive-taxable year period beginning with the
first taxable year beginning after December 31, 2013, for which the
eligible small employer files an income tax return with an attached
Form 8941, ``Credit for Small Employer Health Insurance Premiums'' (or
files a Form 990-T, ``Exempt Organization Business Income Tax Return,''
with an attached Form 8941 in the case of a tax-exempt eligible
employer). For a transition rule for 2014, see Sec. 1.45R-3(i).
(ii) Examples. The following examples illustrate the provisions of
paragraph (a)(3)(i) of this section:
Example 1. (i) Facts. In 2014, an eligible small employer
(Employer) that uses a calendar year as its taxable year begins to
offer insurance through a SHOP Exchange. Employer has 4 employees
and otherwise qualifies for the credit, but none of the employees
enroll in the coverage offered by Employer through the SHOP
Exchange. In mid-2015, the 4 employees enroll for coverage through
the SHOP Exchange but Employer does not file Form 8941 or claim the
credit. In 2016, Employer has 20 employees and all are enrolled in
coverage offered through the SHOP Exchange. Employer files Form 8941
with Employer's 2016 tax return to claim the credit.
(ii) Conclusion. Employer's taxable year 2016 is the first year
of the credit period. Accordingly, Employer's two-year credit period
is 2016 and 2017.
Example 2. (i) Facts. Same facts as Example 1, but Employer
files Form 8941 with Employer's 2015 tax return.
(ii) Conclusion. Employer's taxable year 2015 is the first year
of the credit period. Accordingly, Employer's two-year credit period
is 2015 and 2016 (and does not include 2017). Employer is entitled
to a credit based on a partial year of SHOP Exchange coverage for
Employer's taxable year 2015.
(4) Eligible small employer. (i) The term eligible small employer
means an employer that meets the requirements set forth in Sec. 1.45R-
2.
(ii) For the definition of tax-exempt eligible small employer, see
paragraph (a)(19) of this section.
(iii) A farmers' cooperative described under section 521 that is
subject to tax pursuant to section 1381, and otherwise meets the
requirements of this paragraph (a)(4) and Sec. 1.45R-2, is an eligible
small employer.
(5) Employee--(i) In general. Except as otherwise specifically
provided in this paragraph (a)(5), the term employee means an
individual who is an employee of the eligible small employer under the
common law standard. See Sec. 31.3121(d)-1(c).
(ii) Leased employees. For purposes of this paragraph (a)(5), the
term employee also includes a leased employee (as defined in section
414(n)).
(iii) Certain individuals excluded. The term employee does not
include independent contractors (including sole proprietors), partners
in a partnership, shareholders owning more than two percent of an S
corporation, and any owners of more than five percent of other
businesses. The term employee also does not include family members of
these owners and partners including the employee-spouse of a
shareholder owning more than two percent of the stock of an S
corporation, the employee-spouse of an owner of more than five percent
of a business, the employee-spouse of a partner owning more than a five
percent interest in a partnership, and the employee-spouse of a sole
proprietor.
(iv) Seasonal employees. The term employee does not include
seasonal workers unless the seasonal worker provides services to the
employer on more than 120 days during the taxable year.
(v) Dependents. The term employee does not include any other member
of the household of owners and partners who qualifies as a dependent
under section 152(d)(2)(H).
(vi) Ministers. Whether a minister is an employee is determined
under the common law standard for determining worker status. If, under
the common law standard, a minister is not an employee, the minister is
not an employee for purposes of this paragraph (a)(5) and is not taken
into account in determining an employer's FTEs, and premiums paid for
the minister's health insurance coverage are not taken into account in
computing the credit. If, under the common law standard, a minister is
an employee, the minister is an employee for purposes of this paragraph
(a)(5), and is taken into account in determining an employer's FTEs,
and premiums paid
[[Page 52727]]
by the employer for the minister's health insurance coverage can be
taken into account in computing the credit. Because the performance of
services by a minister in the exercise of his or her ministry is not
treated as employment for purposes of the Federal Insurance
Contributions Act (FICA), compensation paid to the minister is not
wages as defined under section 3121(a), and is not counted as wages for
purposes of computing an employer's average annual wages.
(6) Employer-computed composite rate. The term employer-computed
composite rate refers to a rate for a tier of coverage (such as self-
only or family) of a QHP that is the average rate determined by adding
the premiums for that tier of coverage for all employees eligible to
participate in the QHP (whether or not they actually receive coverage
under the plan or under that tier of coverage) and dividing by the
total number of such eligible employees. The employer-computed
composite rate is used in list billing to convert individual premiums
for a tier of coverage into an employer-computed composite rate for
that tier of coverage.
(7) Exchange. The term Exchange means an exchange as defined in 45
CFR 155.20.
(8) Family member. The term family member is defined with respect
to a taxpayer as a child (or descendant of a child); a sibling or step-
sibling; a parent (or ancestor of a parent); a step-parent; a niece or
nephew; an aunt or uncle; or a son-in-law, daughter-in-law, father-in-
law, mother-in-law, brother-in-law or sister-in-law. A spouse of any of
these family members is also considered a family member.
(9) Full-time equivalent employee (FTE). The number of full-time
equivalent employees (FTEs) is determined by dividing the total number
of hours of service for which wages were paid by the employer to
employees during the taxable year by 2,080. See Sec. 1.45-2(d) and (e)
for permissible methods of calculating hours of service and the method
for calculating the number of an employer's FTEs.
(10) List billing. The term list billing refers to a system of
billing under which a health insurer lists a separate premium for each
employee based on the age of the employee or other factors.
(11) Net premium payments. The term net premium payments means, in
the case of an employer receiving a State tax credit or State subsidy
for providing health insurance to its employees, the excess of the
employer's actual premium payments over the State tax credit or State
subsidy received by the employer. In the case of a State payment
directly to an insurance company (or another entity licensed under
State law to engage in the business of insurance), the employer's net
premium payments are the employer's actual premium payments. If a
State-administered program (such as Medicaid or another program that
makes payments directly to a health care provider or insurance company
on behalf of individuals and their families who meet certain
eligibility guidelines) makes payments that are not contingent on the
maintenance of an employer-provided group health plan, those payments
are not taken into account in determining the employer's net premium
payments.
(12) Nonelective contribution. The term nonelective contribution
means an employer contribution other than a contribution pursuant to a
salary reduction arrangement under section 125.
(13) Payroll taxes. For purposes of section 45R, the term payroll
taxes means amounts required to be withheld as tax from the employees
of a tax-exempt eligible small employer under section 3402, amounts
required to be withheld from such employees under section 3101(b), and
amounts of tax imposed on the tax-exempt eligible small employer under
section 3111(b).
(14) Qualified health plan (QHP). The term qualified health plan
(QHP) means a qualified health plan as defined in Affordable Care Act
section 1301(a) (see 42 U.S.C. 18021(a)), but does not include a
catastrophic plan described in Affordable Care Act section 1302(e) (See
42 U.S.C. 18022(e)).
(15) Qualifying arrangement. The term qualifying arrangement means
an arrangement that requires an eligible small employer to make a
nonelective contribution on behalf of each employee who enrolls in a
QHP offered to employees by the employer through a SHOP Exchange in an
amount equal to a uniform percentage (not less than 50 percent) of the
premium cost of the QHP.
(16) Seasonal worker. The term seasonal worker means a worker who
performs labor or services on a seasonal basis as defined by the
Secretary of Labor, including (but not limited to) workers covered by
29 CFR 500.20(s)(1), and retail workers employed exclusively during
holiday seasons.
(17) Small Business Health Options Program (SHOP). The term Small
Business Health Options Program (SHOP) means an Exchange established
pursuant to section 1311 of the Affordable Care Act and defined in 45
CFR 155.20.
(18) State. The term State means a State as defined in section
7701(a)(10), including the District of Columbia.
(19) Tax-exempt eligible small employer. The term tax-exempt
eligible small employer means an eligible small employer that is exempt
from federal income tax under section 501(a) as an organization
described in section 501(c).
(20) Tier. The term tier refers to a category of coverage under a
benefits package that varies only by the number of individuals covered.
For example, self-only coverage, self plus one coverage, and family
coverage would constitute three separate tiers of coverage.
(21) United States. The term United States means United States as
defined in section 7701(a)(9).
(22) Wages. The term wages for purposes of section 45R means wages
as defined under section 3121(a) for purposes of the Federal Insurance
Contributions Act (FICA), determined without regard to the social
security wage base limitation under section 3121(a)(1).
(b) Effective/applicability date. This section is applicable for
periods after December 31, 2013.
Sec. 1.45R-2 Eligibility for the credit.
(a) Eligible small employer. To be eligible for the credit, an
employer must be an eligible small employer. In order to be an eligible
small employer, with respect to any taxable year, an employer must have
no more than 25 full-time equivalent employees (FTEs), must have in
effect a qualifying arrangement, and the average annual wages of its
FTEs must not exceed an amount equal to twice the dollar amount in
effect under Sec. 1.45R-3(c)(2). To claim the credit for taxable years
beginning in or after 2014, the qualifying arrangement is an
arrangement that requires an employer to make a nonelective
contribution on behalf of each employee who enrolls in a qualified
health plan (QHP) offered to employees through a small business health
options program (SHOP) Exchange in an amount equal to a uniform
percentage (not less than 50 percent) of the premium cost of the QHP.
Notwithstanding the foregoing, an employer that is an agency or
instrumentality of the federal government, or of a State, local or
Indian tribal government, is not an eligible small employer unless it
is an organization described in section 501(c) that is exempt from tax
under section 501(a). An employer does not fail to be an eligible small
employer merely because its employees are not performing services in a
trade or business of the employer. An employer
[[Page 52728]]
located outside the United States (including a U.S. Territory) must
have income effectively connected with the conduct of a trade or
business in the United States, and otherwise meet the requirements of
this section, to be an eligible small employer. For eligibility
standards for SHOP related to foreign employers, see 45 CFR 155.710.
Paragraphs (b) through (f) of this section provide the rules for
determining whether the requirements to be an eligible small employer
are met, including rules related to identifying and counting the
employer's number of the employer's FTEs, counting the employees' hours
of service, and determining the employer's average annual FTE wages for
the taxable year. For rules on determining whether the uniform
percentage requirement is met, see Sec. 1.45R-4.
(b) Application of section 414 employer aggregation rules. All
employers treated as a single employer under section 414(b), (c), (m)
or (o) are treated as a single employer for purposes of this section.
Thus, all employees of a controlled group under section 414(b), (c) or
(o), or an affiliated service group under section 414(m), are taken
into account in determining whether any member of the controlled group
or affiliated service group is an eligible small employer. Similarly,
all wages paid to, and premiums paid for, employees by the members of
the controlled group or affiliated service group are taken into account
when determining the amount of the credit for a group treated as a
single employer under these rules.
(c) Employees taken into account. To be eligible for the credit, an
employer must have employees as defined in Sec. 1.45R-1(a)(5) during
the taxable year. All employees of the eligible small employer are
taken into account for purposes of determining the employer's FTEs and
average annual FTE wages. Employees include former employees who
terminated employment during the year for which the credit is being
claimed, employees covered under a collective bargaining agreement, and
employees who do not enroll in a QHP offered by the employer through a
SHOP Exchange.
(d) Determining the hours of service performed by employees--(1) In
general. An employee's hours of service for a year include each hour
for which an employee is paid, or entitled to payment, for the
performance of duties for the employer during the employer's taxable
year. It also includes each hour for which an employee is paid, or
entitled to payment, by the employer on account of a period of time
during which no duties are performed due to vacation, holiday, illness,
incapacity (including disability), layoff, jury duty, military duty or
leave of absence (except that no more than 160 hours of service are
required to be counted for an employee on account of any single
continuous period during which the employee performs no duties).
(2) Permissible methods. In calculating the total number of hours
of service that must be taken into account for an employee during the
taxable year, eligible small employers need not use the same method for
all employees, and may apply different methods for different
classifications of employees if the classifications are reasonable and
consistently applied. Eligible small employers may change the method
for calculating employees' hours of service for each taxable year. An
eligible small employer may use any of the following three methods.
(i) Actual hours worked. An employer may use the actual hours of
service provided by employees including hours worked and any other
hours for which payment is made or due (as described in paragraph
(d)(1) of this section).
(ii) Days-worked equivalency. An employer may use a days-worked
equivalency whereby the employee is credited with 8 hours of service
for each day for which the employee would be required to be credited
with at least one hour of service under paragraph (d)(1) of this
section.
(iii) Weeks-worked equivalency. An employer may use a weeks-worked
equivalency whereby the employee is credited with 40 hours of service
for each week for which the employee would be required to be credited
with at least one hour of service under paragraph (d)(1) of this
section.
(3) Examples. The following examples illustrate the rules of
paragraph (d) of this section:
Example 1. Counting hours of service by hours actually worked or
for which payment is made or due. (i) Facts. An eligible small
employer (Employer) has payroll records that indicate that Employee
A worked 2,000 hours and that Employer paid Employee A for an
additional 80 hours on account of vacation, holiday and illness.
Employer uses the actual hours worked method described in paragraph
(d)(2)(i) of this section.
(ii) Conclusion. Under this method of counting hours, Employee A
must be credited with 2,080 hours of service (2,000 hours worked and
80 hours for which payment was made or due).
Example 2. Counting hours of service under days-worked
equivalency. (i) Facts. Employee B worked from 8:00 a.m. to 12:00
p.m. every day for 200 days. Employer uses the days-worked
equivalency method described in paragraph (d)(2)(ii) of this
section.
(ii) Conclusion. Under this method of counting hours, Employee B
must be credited with 1,600 hours of service (8 hours for each day
Employee B would otherwise be credited with at least 1 hour of
service x 200 days).
Example 3. Counting hours of service under weeks-worked
equivalency. (i) Facts. Employee C worked 49 weeks, took 2 weeks of
vacation with pay, and took 1 week of leave without pay. Employer
uses the weeks-worked equivalency method described in paragraph
(d)(2)(iii) of this section.
(ii) Conclusion. Under this method of counting hours, Employee C
must be credited with 2,040 hours of service (40 hours for each week
during which Employee C would otherwise be credited with at least 1
hour of service x 51 weeks).
Example 4. Excluded employees. (i) Facts. Employee D worked 3
consecutive weeks at 32 hours per week during the holiday season.
Employee D did not work during the remainder of the year. Employee E
worked limited hours after school from time to time through the year
for a total of 350 hours. Employee E does not work through the
summer. Employer uses the actual hours worked method described in
paragraph (d)(2)(i) of this section.
(ii) Conclusion. Employee D is a seasonal employee who worked
for 120 days or less for Employer during the year. Employee D's
hours are not counted when determining the hours of service of
Employer's employees. Employee E works throughout most of the year
and is not a seasonal employee. Employer counts Employee E's 350
hours of service during the year.
(e) FTE Calculation--(1) In general. The number of an employer's
FTEs is determined by dividing the total hours of service, determined
in accordance with paragraph (d) of this section, credited during the
year to employees taken into account under paragraph (c) of this
section (but not more than 2,080 hours for any employee) by 2,080. The
result, if not a whole number, is then rounded to the next lowest whole
number. If, however, after dividing the total hours of service by
2,080, the resulting number is less than one, the employer rounds up to
one FTE.
(2) Example. The following example illustrates the provisions of
paragraph (e) of this section:
Example. Determining the number of FTEs. (i) Facts. A sole
proprietor pays 5 employees wages for 2,080 hours each, pays 3
employees wages for 1,040 hours each, and pays 1 employee wages for
2,300 hours. One of the employees working 2,080 hours is the sole
proprietor's nephew. The sole proprietor's FTEs would be calculated
as follows: 8,320 hours of service for the 4 employees paid for
2,080 hours each (4 x 2,080); the sole proprietor's nephew is
excluded from the FTE calculation; 3,120 hours of service for the 3
employees paid for 1,040 hours each (3 x 1,040); and 2,080 hours of
service for the 1 employee paid for 2,300 hours (lesser of 2,300 and
2,080). The sum of the included hours of service equals 13,520 hours
of service.
[[Page 52729]]
(ii) Conclusion. The sole proprietor's FTEs equal 6 (13,520
divided by 2,080 = 6.5, rounded to the next lowest whole number).
(f) Determining the employer's average annual FTE wages--(1) In
general. All wages paid to employees (including overtime pay) are taken
into account in computing an eligible small employer's average annual
FTE wages. The average annual wages paid by an employer for a taxable
year is determined by dividing the total wages paid by the eligible
small employer during the employer's taxable year to employees taken
into account under paragraph (c) of this section by the number of the
employer's FTEs for the year. The result is then rounded down to the
nearest $1,000 (if not otherwise a multiple of $1,000). For purposes of
determining the employer's average annual wages for the taxable year,
only wages that are paid for hours of service determined under
paragraph (d) of this section are taken into account.
(2) Example. The following example illustrates the provision of
paragraphs (e) and (f) of this section:
Example. (i) Facts. An employer has 26 FTEs with average annual
wages of $23,000. Only 22 of the employer's employees enroll for
coverage offered by the employer through a SHOP Exchange.
(ii) Conclusion. The hours of service and wages of all employees
are taken into consideration in determining whether the employer is
an eligible small employer for purposes of the credit. Because the
employer does not have fewer than 25 FTEs for the taxable year, the
employer is not an eligible small employer for purposes of this
section, even if less than 25 employees (or FTEs) enroll for
coverage through the SHOP Exchange.
(g) Effective/applicability date. This section is applicable for
periods after December 31, 2013.
Sec. 1.45R-3 Calculating the credit.
(a) In general. The tax credit available to an eligible small
employer equals 50 percent of the eligible small employer's premium
payments made on behalf of its employees under a qualifying
arrangement, or in the case of a tax-exempt eligible small employer,
equals 35 percent of the employer's premium payments made on behalf of
its employees under a qualifying arrangement. The employer's tax credit
is subject to the following adjustments and limitations:
(1) The average premium limitation for the small group market in
the rating area in which the employee enrolls for coverage, described
in paragraph (b) of this section;
(2) The credit phaseout described in paragraph (c) of this section;
(3) The net premium payment limitation in the case of State credits
or subsidies described in paragraph (d) of this section;
(4) The payroll tax limitation for a tax-exempt eligible small
employer described in paragraph (e) of this section;
(5) The two-consecutive-taxable year credit period limitation,
described in paragraph (f) of this section;
(6) The rules with respect to the premium payments taken into
account, described in paragraph (g) of this section;
(7) The rules with respect to credits applicable to trusts,
estates, regulated investment companies, real estate investment trusts
and cooperatives described in paragraph (h) of this section; and
(8) The transition relief for 2014 described in paragraph (i) of
this section.
(b) Average premium limitation--(1) In general. The amount of an
eligible small employer's premium payments that are taken into account
in calculating the credit is limited to the premium payments the
employer would have made under the same arrangement if the average
premium for the small group market in the rating area in which the
employee enrolls for coverage were substituted for the actual premium.
(2) Examples. The following examples illustrate the provisions of
paragraph (b)(1) of this section:
Example 1. Comparing premium payments to average premium for
small group market. (i) Facts. An eligible small employer (Employer)
offers a health insurance plan with self-only and family coverage
through a small business options program (SHOP) Exchange. Employer
has 9 full-time equivalent employees (FTEs) with average annual
wages of $23,000 per FTE. All 9 employees are employees as defined
under Sec. 1.45R-1(a)(5). Four employees are enrolled in self-only
coverage and 5 are enrolled in family coverage. Employer pays 50% of
the premiums for all employees enrolled in self-only coverage and
50% of the premiums for all employees enrolled in family coverage
(and the employee is responsible for the remainder in each case).
The premiums are $4,000 a year for self-only coverage and $10,000 a
year for family coverage. The average premium for the small group
market in Employer's rating area is $5,000 for self-only coverage
and $12,000 for family coverage. Employer's premium payments for
each FTE ($2,000 for self-only coverage and $5,000 for family
coverage) do not exceed 50 percent of the average premium for the
small group market in Employer's rating area ($2,500 for self-only
coverage and $6,000 for family coverage).
(ii) Conclusion. The amount of premiums paid by Employer for
purposes of computing the credit equals $33,000 ((4 x $2,000) plus
(5 x $5,000)).
Example 2. Premium payments exceeding average premium for small
group market. (i) Facts. Same facts as Example 1, except that the
premiums are $6,000 for self-only coverage and $14,000 for family
coverage. Employer's premium payments for each employee ($3,000 for
self-only coverage and $7,000 for family coverage) exceed 50% of the
average premium for the small group market in Employer's rating area
($2,500 for self-only coverage and $6,000 for family coverage).
(ii) Conclusion. The amount of premiums paid by Employer for
purposes of computing the credit equals $40,000 ((4 x $2,500) plus
(5 x $6,000)).
(c) Credit phaseout--(1) In general. The tax credit is subject to a
reduction (but not reduced below zero) if the employer's FTEs exceed 10
or average annual FTE wages exceed $25,000. If the number of FTEs
exceeds 10, the reduction is determined by multiplying the otherwise
applicable credit amount by a fraction, the numerator of which is the
number of FTEs in excess of 10 and the denominator of which is 15. If
average annual FTE wages exceed $25,000, the reduction is determined by
multiplying the otherwise applicable credit amount by a fraction, the
numerator of which is the amount by which average annual FTE wages
exceed $25,000 and the denominator of which is $25,000. In both cases,
the result of the calculation is subtracted from the otherwise
applicable credit to determine the credit to which the employer is
entitled. For an employer with both more than 10 FTEs and average
annual FTE wages exceeding $25,000, the total reduction is the sum of
the two reductions.
(2) $25,000 dollar amount adjusted for inflation. For taxable years
beginning in a calendar year after 2013, each reference to ``$25,000''
in paragraph (c)(1) of this section is replaced with a dollar amount
equal to $25,000 multiplied by the cost-of-living adjustment under
section 1(f)(3) for the calendar year, determined by substituting
``calendar year 2012'' for ``calendar year 1992'' in section
1(f)(3)(B).
(3) Examples. The following examples illustrate the provisions of
paragraph (c) this section. For purposes of these examples, no employer
is a tax-exempt organization and no other adjustments or limitations on
the credit apply other than those adjustments and limitations
explicitly set forth in the example.
Example 1. Calculating the maximum credit for an eligible small
employer without an applicable credit phaseout. (i) Facts. An
eligible small employer (Employer) has 9 FTEs with average annual
wages of $23,000. Employer pays $72,000 in health insurance premiums
for those employees (which does
[[Page 52730]]
not exceed the total average premium for the small group market in
the rating area), and otherwise meets the requirements for the
credit.
(ii) Conclusion. Employer's credit equals $36,000 (50% x
$72,000).
Example 2. Calculating the credit phaseout if the number of FTEs
exceeds 10 or average annual wages exceed $25,000, as adjusted for
inflation. (i) Facts. An eligible small employer (Employer) has 12
FTEs and average annual FTE wages of $30,000 in a year when the
amount in paragraph (c)(1) of this section, as adjusted for
inflation, is $25,000. Employer pays $96,000 in health insurance
premiums for its employees (which does not exceed the average
premium for the small group market in the rating area) and otherwise
meets the requirements for the credit.
(ii) Conclusion. The initial amount of the credit is determined
before any reduction (50% x $96,000) = $48,000. The credit reduction
for FTEs in excess of 10 is $6,400 ($48,000 x 2/15). The credit
reduction for average annual FTE wages in excess of $25,000 is
$9,600 ($48,000 x $5,000/$25,000), resulting in a total credit
reduction of $16,000 ($6,400 + $9,600). Employer's total tax credit
equals $32,000 ($48,000-$16,000).
(d) State credits and subsidies for health insurance--(1) Payments
to employer. If the employer is entitled to a State tax credit or a
premium subsidy that is paid directly to the employer, the premium
payment made by the employer is not reduced by the credit or subsidy
for purposes of determining whether the employer has satisfied the
requirement to pay an amount equal to a uniform percentage (not less
than 50 percent) of the premium cost. Also, except as described in
paragraph (d)(3) of this section, the maximum amount of the credit is
not reduced by reason of a State tax credit or subsidy or by reason of
payments by a State directly to an employer.
(2) Payments to issuer. If a State makes payments directly to an
insurance company (or another entity licensed under State law to engage
in the business of insurance) to pay a portion of the premium for
coverage of an employee enrolled for coverage through a SHOP Exchange,
the State is treated as making these payments on behalf of the employer
for purposes of determining whether the employer has satisfied the
requirement to pay an amount equal to a uniform percentage (not less
than 50 percent) of the premium cost of coverage. Also, except as
described below in paragraph (d)(3) of this section, these premium
payments by the State are treated as an employer contribution under
this section for purposes of calculating the credit.
(3) Credits may not exceed net premium payment. Regardless of the
application of paragraphs (d)(1) and (d)(2) of this section, in no
event may the amount of the credit exceed the amount of the employer's
net premium payments as defined in Sec. 1.45R-1(a)(11).
(4) Examples. The following examples illustrate the provisions of
paragraphs (d)(1) through (d)(3) of this section. For purposes of these
examples, the eligible small employer's taxable year and plan year
begin during or after 2014. No other adjustments or limitations on the
credit apply other than those adjustments and limitations explicitly
set forth in the example.
Example 1. State premium subsidy paid directly to employer. (i)
Facts. The State in which an eligible small employer (Employer)
operates provides a health insurance premium subsidy of up to 40% of
the health insurance premiums for each eligible employee. The State
pays the subsidy directly to Employer. Employer has one employee,
Employee D. Employee D's health insurance premiums are $100 per
month and are paid as follows: $80 by Employer and $20 by Employee D
through salary reductions to a cafeteria plan. The State pays
Employer $40 per month as a subsidy for Employer's payment of
insurance premiums on behalf of Employee D. Employer is otherwise an
eligible small employer that meets the requirements for the credit.
(ii) Conclusion. For purposes of calculating the credit, the
amount of premiums paid by the employer is $80 per month (the
premium payment by the Employer without regard to the subsidy from
the State). The maximum credit is $40 ($80 x 50%).
Example 2. State premium subsidy paid directly to insurance
company. (i) Facts. The State in which Employer operates provides a
health insurance premium subsidy of up to 30% for each eligible
employee. Employer has one employee, Employee E. Employee E is
enrolled in self-only coverage through a qualified health plan (QHP)
offered by Employer through a SHOP Exchange. Employee E's health
insurance premiums are $100 per month and are paid as follows: $50
by Employer; $30 by the State and $20 by the employee. The State
pays the $30 per month directly to the insurance company and the
insurance company bills Employer for the employer and employee's
share, which equal $70 per month. Employer is otherwise an eligible
small employer that meets the requirements for the credit.
(ii) Conclusion. For purposes of calculating the amount of the
credit, the amount of premiums paid by Employer is $80 per month
(the sum of Employer's payment and the State's payment). The maximum
credit is $40 ($80 x 50%).
Example 3. Credit limited by employer's net premium payment. (i)
Facts. Employer is an eligible small employer that is not a tax-
exempt organization. The State in which Employer operates provides a
health insurance premium subsidy of up to 50% for each eligible
employee. Employer has one employee, Employee F. Employee F is
enrolled in self-only coverage under the QHP offered to Employee F
by Employer through a SHOP Exchange. Employee F's health insurance
premiums are $100 per month and are paid as follows: $20 by
Employer; $50 by the State and $30 by Employee F. The State pays the
$50 per month directly to the insurance company and the insurance
company bills Employer for the employer's and employee's shares,
which total $50 per month. Employer is otherwise an eligible small
employer that meets the requirements for the credit. The amount of
premiums paid by Employer (the sum of Employer's payment and the
State's payment) is $70 per month, which is more than 50% of the
$100 monthly premium payment. The amount of the premium for
calculating the credit is also $70 per month.
(ii) Conclusion. The maximum credit without adjustments or
limitations is $35 ($70 x 50%). Employer's net premium payment is
$20 (the amount actually paid by Employer excluding the State
subsidy). Because the credit may not exceed Employer's net premium
payment, the credit is $20 (the lesser of $35 or $20).
(e) Payroll tax limitation for tax-exempt eligible small
employers--(1) In general. For a tax-exempt eligible employer, the
amount of the credit claimed cannot exceed the total amount of payroll
taxes (as defined in Sec. 1.45R-1(a)(13)) of the employer during the
calendar year in which the taxable year begins.
(2) Example. The following example illustrates the provisions of
paragraph (e)(1) of this section. For purposes of this example, the
eligible small employer's taxable year and plan year begin during or
after 2014. No other adjustments or limitations on the credit apply
other than those adjustments and limitations explicitly set forth in
the example.
Example. Calculating the maximum credit for a tax-exempt
eligible small employer. (i) Facts. Employer is a tax-exempt
eligible small employer that has 10 FTEs with average annual wages
of $21,000. Employer pays $80,000 in health insurance premiums for
its employees (which does not exceed the average premium for the
small group market in the rating area) and otherwise meets the
requirements for the credit. The total amount of Employer's payroll
taxes equals $30,000.
(ii) Conclusion. The initial amount of the credit is determined
before any reduction: (35% x $80,000) = $28,000, and Employer's
payroll taxes are $30,000. The total tax credit equals $28,000 (the
lesser of $28,000 and $30,000).
(f) Two-consecutive-taxable year credit period limitation. The
credit is only available to an eligible small employer, including a
tax-exempt eligible small employer, during that employer's credit
period. For a transition rule for 2014, see paragraph (i) of this
section. To prevent the avoidance of the two-year limit on the credit
period through the use of successor entities, a successor entity and a
predecessor entity are treated as
[[Page 52731]]
the same employer. For this purpose, the rules for identifying
successor entities under Sec. 31.3121(a)(1)-1(b) apply. Accordingly,
for example, if an eligible small employer claims the credit for the
2014 and 2015 taxable years, that eligible small employer's credit
period will have expired so that any successor employer to that
eligible small employer will not be able to claim the credit for any
subsequent taxable years.
(g) Premium payments by the employer for a taxable year--(1) In
general. Only premiums paid by an eligible small employer or tax-exempt
eligible small employer on behalf of each employee enrolled in a QHP or
payments paid to the issuer in accordance with paragraph (d)(2) of this
section are counted in calculating the credit. If an eligible small
employer pays only a portion of the premiums for the coverage provided
to employees (with employees paying the rest), only the portion paid by
the employer is taken into account. Premiums paid on behalf of seasonal
workers may be counted in determining the amount of the credit (even
though seasonal worker wages and hours of service are not included in
the FTE and average annual FTE wage calculation unless the seasonal
worker works for the employer on more than 120 days during the taxable
year).
(2) Excluded amounts--(i) Salary reduction amounts. Any premium
paid pursuant to a salary reduction arrangement under a section 125
cafeteria plan is not treated as paid by the employer for purposes of
section 45R and these regulations. For this purpose, premiums paid with
employer-provided flex credits that employees may elect to receive as
cash or other taxable benefit are treated as paid pursuant to a salary
reduction arrangement under a section 125 cafeteria plan.
(ii) HSAs, HRAs, and FSAs. Employer contributions to, or amounts
made available under, health savings accounts, reimbursement
arrangements, and health flexible spending arrangements are not taken
into account in determining the premium payments by the employer for a
taxable year.
(h) Rules applicable to trusts, estates, regulated investment
companies, real estate investment trusts and cooperative organizations.
Rules similar to the rules of section 52(d) and (e) and the regulations
thereunder apply in calculating and apportioning the credit with
respect to a trust, estate, a regulated investment company or real
estate investment trusts or cooperative organization.
(i) Transition rule for 2014--(1) In general. This paragraph (i)
applies if as of August 26, 2013 an eligible small employer offers
coverage on a plan year that begins on a date other than the first day
of its taxable year. In such a case, if an eligible small employer has
a health plan year beginning after January 1, 2014 but before January
1, 2015 (2014 health plan year) that begins after the start of its
first taxable year beginning after January 1, 2014 (2014 taxable year),
and the employer offers one or more QHPs to its employees through a
SHOP Exchange as of the first day of its 2014 health plan year, then
the eligible small employer is treated as offering coverage through a
SHOP Exchange for its entire 2014 taxable year for purposes of section
45R if the health care coverage provided from the first day of the 2014
taxable year through the day immediately preceding the first day of the
2014 health plan year would have qualified for a credit under section
45R using the rules applicable to taxable years beginning before
January 1, 2014. If the eligible small employer claims the section 45R
credit in the 2014 taxable year, the 2014 taxable year begins the first
year of the credit period.
(2) Example. The following example illustrates the rule of
paragraph (i) of this section. For purposes of this example, the
eligible small employer is not a tax-exempt organization. No other
adjustments or limitations on the credit apply other than those
adjustments and limitations explicitly set forth in the example.
Example. (i) Facts. An eligible small employer (Employer) has a
2014 taxable year that begins January 1, 2014 and ends on December
31, 2014, and a 2014 health plan year that begins July 1, 2014 and
ends June 30, 2015. Employer offers a QHP through a SHOP Exchange
the coverage under which begins July 1, 2014. Employer provides
coverage from January 1, 2014 through June 30, 2014 that would have
qualified for a credit under section 45R using the rules applicable
to taxable years beginning before January 1, 2014.
(ii) Conclusion. Employer may claim the credit at the 50% rate
under section 45R for the entire 2014 taxable year using the rules
under paragraph (i) of this section. Accordingly, in calculating the
credit, Employer may count premiums paid for coverage from January
1, 2014 through June 30, 2014, as well as premiums paid from July 1,
2014 through December 31, 2014. If Employer claims the credit for
the 2014 taxable year, that taxable year is the first year of the
credit period.
(j) Effective/applicability date. This section is applicable for
periods after December 31, 2013.
Sec. 1.45R-4 Uniform percentage of premium paid.
(a) In general. An eligible small employer must pay a uniform
percentage (not less than 50 percent) of the premium for each employee
enrolled in a qualified health plan (QHP) offered to employees by the
employer through a small business health options program (SHOP)
Exchange.
(b) Employers offering one QHP. An employer that offers a single
QHP through a SHOP Exchange must satisfy the requirements of this
paragraph (b).
(1) Employers offering one QHP, self-only coverage, composite
billing. For an eligible small employer offering self-only coverage and
using composite billing, the employer satisfies the requirements of
this paragraph if it pays the same amount toward the premium for each
employee receiving self-only coverage under the QHP, and that amount is
equal to at least 50 percent of the premium for self-only coverage.
(2) Employers offering one QHP, other tiers of coverage, composite
billing. For an eligible small employer offering one QHP providing at
least one tier of coverage with a higher premium than self-only
coverage and using composite billing, the employer satisfies the
requirements of this paragraph (b)(2) if it either--
(i) Pays an amount for each employee enrolled in that more
expensive tier of coverage that is the same for all employees and that
is no less than the amount that the employer would have contributed
toward self-only coverage for that employee, or
(ii) Meets the requirements of paragraph (b)(1) of this section for
each tier of coverage that if offers.
(3) Employers offering one QHP, self-only coverage, list billing.
For an eligible small employer offering one QHP providing only self-
only coverage and using list billing, the employer satisfies the
requirements of this paragraph (b)(3) if either--
(i) The employer pays toward the premium an amount equal to a
uniform percentage (not less than 50 percent) of the premium charged
for each employee, or
(ii) The employer converts the individual premiums for self-only
coverage into an employer-computed composite rate for self-only
coverage, and, if an employee contribution is required, each employee
who receives coverage under the QHP pays a uniform amount toward the
self-only premium that is no more than 50 percent of the employer-
computed composite rate for self-only coverage.
[[Page 52732]]
(4) Employers offering one QHP, other tiers of coverage, list
billing. For an eligible small employer offering one QHP providing at
least one tier of coverage with a higher premium than self-only
coverage and using list billing, the employer satisfies the
requirements of this paragraph (b)(4) if it either--
(i) Pays toward the premium for each employee covered under each
tier of coverage an amount equal to or exceeding the amount that the
employer would have contributed with respect to that employee for self-
only coverage, calculated either based upon the actual premium that
would have been charged by the insurer for that employee for self-only
coverage or based upon the employer-computed composite rate for self-
only coverage, or
(ii) Meets the requirements of paragraph (b)(3) of this section for
each tier of coverage that it offers substituting the employer-computed
composite rate for each tier of coverage for the employer-computed
composite rate for self-only coverage.
(c) Employers offering more than one QHP. If an eligible small
employer offers more than one QHP, the employer must satisfy the
requirements of this paragraph (c). The employer may satisfy the
requirements of this paragraph (c) in either of the following two ways:
(1) QHP-by-QHP method. The employer makes payments toward the
premium with respect to each QHP for which the employer is claiming the
credit that satisfy the uniform percentage requirement under paragraph
(b) of this section on a QHP-by-QHP basis (so that the amounts or
percentages of premium paid by the employer for each QHP need not be
identical, but the payments with respect to each QHP must satisfy
paragraph (b) of this section); or
(2) Reference QHP method. The employer designates a reference QHP
and makes employer contributions in accordance with the following
requirements--
(i) The employer determines a level of employer contributions for
each employee such that, if all eligible employees enrolled in the
reference QHP, the contributions would satisfy the uniform percentage
requirement under paragraph (b) of this section, or
(ii) The employer allows each employee to apply the minimum amount
of employer contribution determined necessary to meet the uniform
percentage requirement under paragraph (b) of this section either
toward the reference QHP or toward the cost of coverage under any of
the other available QHPs.
(d) Special rules regarding employer compliance with applicable
State or local law. An employer will be treated as satisfying the
uniform percentage requirement if the failure to otherwise satisfy the
uniform percentage requirement is attributable solely to additional
employer contributions made to certain employees to comply with an
applicable State or local law.
(e) Examples. The following examples illustrate the provisions of
paragraphs (a) through (d) of this section:
Example 1. (i) Facts. An eligible small employer (Employer)
offers a QHP on a SHOP Exchange, Plan A, which uses composite
billing. The premiums for Plan A are $5,000 per year for self-only
coverage, and $10,000 for family coverage. Employees can elect self-
only or family coverage under Plan A. Employer pays $3,000 (60% of
the premium) toward self-only coverage under Plan A and $6,000 (60%
of the premium) toward family coverage under Plan A.
(ii) Conclusion. Employer's contributions of 60% of the premium
for each tier of coverage satisfy the uniform percentage
requirement.
Example 2. (i) Facts. Same facts as Example 1, except that
Employer pays $3,000 (60% of the premium) for each employee electing
self-only coverage under Plan A and pays $3,000 (30% of the premium)
for each employee electing family coverage under Plan A.
(ii) Conclusion. Employer's contributions of 60% of the premium
toward self-only coverage and the same dollar amount toward the
premium for family coverage satisfy the uniform percentage
requirement, even though the percentage is not the same.
Example 3. (i) Facts. Employer offers two QHPs, Plan A and Plan
B, both of which use composite billing. The premiums for Plan A are
$5,000 per year for self-only coverage and $10,000 for family
coverage. The premiums for Plan B are $7,000 per year for self-only
coverage and $13,000 for family coverage. Employees can elect self-
only or family coverage under either Plan A or Plan B. Employer pays
$3,000 (60% of the premium) for each employee electing self-only
coverage under Plan A, $3,000 (30% of the premium) for each employee
electing family coverage under Plan A, $3,500 (50% of the premium)
for each employee electing self-only coverage under Plan B, and
$3,500 (27% of the premium) for each employee electing family
coverage under Plan B.
(ii) Conclusion. Employer's contributions of 60% (or $3,000) of
the premiums for self-only coverage and the same dollar amounts
toward the premium for family coverage under Plan A, and of 50% (or
$3,500) of the premium for self-only of coverage and the same dollar
amount toward the premium for family coverage under Plan B, satisfy
the uniform percentage requirement on a QHP-by-QHP basis; therefore
the employer's contributions to both plans satisfy the uniform
percentage requirement.
Example 4. (i) Facts. Same facts as Example 3, except that
Employer designates Plan A as the reference QHP. Employer pays
$2,500 (50% of the premium) for each employee electing self-only
coverage under Plan A and pays $2,500 of the premium for each
employee electing family coverage under Plan A or either self-only
or family coverage under Plan B.
(ii) Conclusion. Employer's contribution of 50% (or $2,500)
toward the premium of each employee enrolled under Plan A or Plan B
satisfies the uniform percentage requirement.
Example 5. (i) Facts. Employer receives a list billing premium
quote with respect to Plan X, a QHP offered by Employer on a SHOP
Exchange for health insurance coverage for each of Employer's four
employees. For Employee L, age 20, the self-only premium is $3,000
per year, and the family premium is $8,000. For Employees M, N and
O, each age 40, the self-only premium is $5,000 per year and the
family premium is $10,000. The total self-only premium for the four
employees is $18,000 ($3,000 + (3 x 5,000)). Employer calculates an
employer-computed composite self-only rate of $4,500 ($18,000/4).
Employer offers to make contributions such that each employee would
need to pay $2,000 of the premium for self-only coverage. Under this
arrangement, Employer would contribute $1,000 toward self-only
coverage for L and $3,000 toward self-only coverage for M, N, and O.
In the event an employee elects family coverage, Employer would make
the same contribution ($1,000 for L or $3,000 for M, N, or O) toward
the family premium.
(ii) Conclusion. Employer satisfies the uniform percentage
requirement because it offers and makes contributions based on an
employer-calculated composite self-only rate such that, to receive
self-only coverage, each employee must pay a uniform amount which is
not more than 50% of the composite rate, and it allows employees to
use the same employer contributions toward family coverage.
Example 6. (i) Facts. Same facts as Example 5, except that
Employer calculates an employer-computed composite family rate of
$9,500 (($8,000 + 3 x 10,000)/4) and requires each employee to pay
$4,000 of the premium for family coverage.
(ii) Conclusion. Employer satisfies the uniform percentage
requirement because it offers and makes contributions based on a
calculated self-only and family rate such that, to receive either
self-only or family coverage, each employee must pay a uniform
amount which is not more than 50% of the composite rate for coverage
of that tier.
Example 7. (i) Facts. Same facts as Example 5, except that
Employer also receives a list billing premium quote from Plan Y with
respect to a second QHP offered by Employer on a SHOP Exchange for
each of Employer's 4 employees. Plan Y's quote for Employee L, age
20, is $4,000 per year for self-only coverage or $12,000 per year
for family coverage. For Employees M, N and O, each age 40, the
premium is $7,000 per year for self-only coverage or $15,000 per
year for family coverage. The total self-only premium under Plan Y
is $25,000 ($4,000 + (3 x 7,000)). The employer-computed composite
self-only rate is $6,250 ($25,000/4). Employer designates Plan X as
the reference plan. Employer offers to make contributions based
[[Page 52733]]
on the employer-calculated composite premium for the reference QHP
(Plan X) such that each employee has to contribute $2,000 to receive
self-only coverage through Plan X. Under this arrangement, Employer
would contribute $1,000 toward self-only coverage for L and $3,000
toward self-only coverage for M, N, and O. In the event an employee
elects family coverage through Plan X or either self-only or family
coverage through Plan Y, Employer would make the same contributions
($1,000 for L or $3,000 for M, N, or O) toward that coverage.
(ii) Conclusion. Employer satisfies the uniform percentage
requirement because it offers and makes contributions based on the
employer-calculated composite self-only premium for the Plan X
reference QHP such that, in order to receive self-only coverage,
each employee must pay a uniform amount which is not more than 50%
of the self-only composite premium of the reference QHP; it allows
employees to use the same employer contributions toward family
coverage in the reference QHP or coverage through another QHPs.
Example 8. (i) Facts. Employer has five employees. Employer is
located in a State that requires employers to pay 50% of employees'
premium costs, but also requires that an employee's contribution not
exceed a certain percentage of the employee's monthly gross earnings
from that employer. Employer offers to pay 50% of the premium costs
for all its employees, and to comply with the State law, Employer
contributes more than 50% of the premium costs for two of its
employees.
(ii) Conclusion. Employer satisfies the uniform percentage
requirement because its failure to otherwise satisfy the uniform
percentage requirement is attributable solely to compliance with the
applicable State or local law.
(f) Effective/applicability date. This section is applicable for
periods after December 31, 2013.
Sec. 1.45R-5 Claiming the credit.
(a) Claiming the credit. The credit is a general business credit
and is claimed on an eligible small employer's annual income tax return
and offsets an employer's actual tax liability for the year. The credit
is claimed by attaching Form 8941, ``Credit for Small Employer Health
Insurance Premiums,'' to the eligible small employer's income tax
return or, in the case of a tax-exempt eligible small employer, by
attaching Form 8941 to the employer's Form 990-T, ``Exempt Organization
Business Income Tax Return.'' To claim the credit, a tax-exempt
eligible small employer must file a form 990-T with an attached Form
8941, even if a Form 990-T would not otherwise be required to be filed.
(b) Estimated tax payments and alternative minimum tax (AMT)
liability. An eligible small employer may reflect the credit in
determining estimated tax payments for the year in which the credit
applies in accordance with the estimated tax rules as set forth in
section 6654 and 6655 and the applicable regulations. An eligible small
employer may also use the credit to offset the employer's alternative
minimum tax (AMT) liability for the year, if any, subject to certain
limitations based on the amount of an eligible small employer's regular
tax liability, AMT liability and other allowable credits. See section
38(c)(1), as modified by section 38(c)(4)(B)(vi). However, an eligible
small employer, including a tax-exempt eligible small employer, may not
reduce its deposits and payments of employment tax (that is, income tax
required to be withheld under section 3402, social security and
Medicare tax under sections 3101 and 3111, and federal unemployment tax
under section 3301) during the year in anticipation of the credit.
(c) Reduction of section 162 deduction. No deduction under section
162 is allowed for the eligible small employer for that portion of the
health insurance premiums that is equal to the amount of the credit
under Sec. 1.45R-2.
(d) Effective/applicability date. This section is applicable for
periods after December 31, 2013.
Heather C. Maloy,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2013-20769 Filed 8-23-13; 8:45 am]
BILLING CODE 4830-01-P