IRS Issues Proposed Rule On ACA Small Business Tax Credit

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The Internal Revenue Service Aug. 23 issued a proposed rule on the tax credit available under the Affordable Care Act to certain small employers that offer health insurance coverage to their employees.

The proposed rule (REG-113792-13) falls under tax code Section 45R, which offers the tax credit to small employers through ACA. The proposed rule applies to small employers with no more than 25 full-time employees who each annually earn less than $50,000 for the taxable year. The rule was published in the Aug. 26 Federal Register (78 Fed. Reg. 52,719).

The employers also must have a qualifying arrangement in effect that requires them to pay at least 50 percent of the premium cost of a qualified health plan offered to their employees through a Small Business Health Options Program (SHOP) exchange, the IRS said.

For taxable years beginning Jan. 1, 2014, the maximum credit for an eligible small employer, other than a tax-exempt one, is 50 percent of the premium payments made on behalf of its employees under the qualified health plan. For tax-exempt small employers, the maximum credit is 35 percent.

Federal, state, local, or tribal government entities are not eligible for the tax credit under Section 45R, unless it is an organization described in Section 501(a) and otherwise meets the eligible small employer requirements, the IRS said.

However, qualifying farmers' cooperatives described under Section 521 and subject to tax under Section 1381 would be considered eligible small employers for the purposes of the credit, the IRS said.

Aggregation Rules

The rule proposes to treat all employers that are treated as a single employer under Sections 414(b), (c), (m), or (o) as a single employer for the purposes of the Section 45R credit.

“For example, all employees of the employers treated as a single employer are counted in computing the single employer's [full-time equivalent employees] and average annual wages,” the IRS said.

The aggregation rules would apply 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, or other passthrough entities under common control under Section 414(c), the IRS said. For the purposes of the tax credit, Section 414 would also be considered applicable to tax-exempt eligible small employers under common control, the Service said.

The tax credit would phase out for small employers who have more than 10 FTE employees, or if the average annual wages for the FTEs exceed $25,000, the IRS said. For an employer where both these situations apply, the credit would be reduced based on the sum of the two reductions, possibly down to zero for some employers, the proposed rule said.

Counting Employees

For the purposes of the Section 45R tax credit, all employees who perform services for the employer during the taxable year must be taken into account in determining FTEs and average annual wages, the Service said.

This calculation includes employees who are not performing services in the employer's trade or business, the proposed rule said.

However, a number of individuals cannot be considered employees when calculating the credit; further, their hours and wages are not counted when determining an employer's eligibility for the credit, the IRS said.

These individuals include:

• independent contractors, including sole proprietors;

• partners in a partnership;

• shareholders owning more than 2 percent of an S corporation;

• owners of more than 5 percent of other businesses;

• family members, including children, spouses, siblings, parents, in-laws, and a variety of other close family relations; and

• individuals who are not family members but are listed as dependents on the individual income tax return of an excluded individual.

 

Seasonal Workers

The proposed rule provides additional guidance, under Section 45R(d)(5), on seasonal workers who work for 120 or fewer days during the taxable year. These individuals are not to be considered employees when determining FTEs and average annual wages, the proposed rule said.

However, premiums paid on behalf of seasonal workers may be counted in determining the amount of the credit, the IRS said.

Examples of seasonal workers include holiday or summer retail workers, the Service said.

Work Hour Determinations

The proposed rule would require an employer to calculate employees' hours of service in order to determine the number of FTE employees it has.

Under the rule, employers could avail themselves of three methods for calculating the total number of hours for each employee for the taxable year: actual hours worked, days-worked equivalency, or 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,” the IRS said.

Hours of service would include vacation, holiday and sick leave, as well as incapacity or disability, layoffs, jury duty, military duty, or leave of absence, the proposed rule said.

In certain circumstances, employers with 25 or more employees still may qualify for the tax credit if some of them work less than full time, the IRS said.

Credit Limitation Abuse

The small business tax credit is limited to two years under Section 45R, beginning once an eligible 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, the IRS said.

The proposed rule provides that the IRS or Treasury Department may make regulations as necessary to prevent the avoidance of the two-year limit on the credit through the use of successor entities, or the avoidance of the credit phaseout limitations through the use of multiple entities.

“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,” the IRS said.

The proposed rule also provides guidance on determining the average annual FTE wages, as well as specific guidance for employers who offer one or multiple qualified health plans to employees. The rule also explains how employers could apply for the credit, and how the credit should be reflected in a small employer's estimated tax payments or used to offset their alternative minimum tax liability.

Weighing Compliance Against Credit

In their current state, the proposed rule constitutes “a lot of work to go through for a temporary tax credit,” Molly Brogan, a spokeswoman for the National Small Business Association, told BNA Aug. 23.

Due to the complexity of the rule, fewer small businesses may go through the effort to obtain it than are actually eligible for it, Brogan said. “The whole impetus is to make it more affordable for smaller, lower-wage companies [to provide health insurance],” Brogan said.

Many small employers do not have a human resources person to perform the calculations and compliance, which leaves employers to figure the rule out on their own or hire an accountant, cutting into the benefit of the credit, Brogan said.

One of the most complex areas will be determining how many employees an employer has for the purpose of the tax credit, she said.

Any effort to make it easier is positive, because there are “so many layers of complexity,” Brogan said.

Comments or requests for a public hearing on the proposed rule must be received by Nov. 25.


Text of the proposed rule is available in HealthDocs™.