Medical Billing Blog

Small Business Health Care Tax Credit: IRS Releases Final Rules

Posted by Scott Shatzman on Mon, Jun, 30, 2014 @ 13:06 PM

SHOPThe Internal Revenue Service (IRS) has issued final regulations on the small business health care tax credit under Health Care Reform, which include information on the requirement to purchase health insurance coverage through the Small Business Health Options Program (SHOP) Marketplace. 

 

Background
The Small Business Health Care Tax Credit helps small employers afford the cost of providing health care coverage for their employees and is specifically targeted for those employers with low- and moderate-income workers.  For tax years beginning in 2014 or later, the maximum credit is 50% of premiums paid for small businesses and 35% of premiums paid for small tax-exempt employers. In order to be eligible for the credit:

 

  • The employer must have no more than 25 full-time equivalent employees (FTEs) for the taxable year;

    •  Note: The phase out of the credit operates in such a way that an employer with exactly 25 FTEs is not in fact eligible for the credit.

  • The average annual wages of its employees for the year must not exceed $50,000 ($50,800 for calendar year 2014); and

  • The employer must pay at least 50% of the premium cost for single health care coverage for each employee.

 

For tax years beginning in 2014 or later, small employers must obtain health insurance through the SHOP to qualify for the credit, which can only be claimed for two-consecutive taxable years.

 

Final Rules
The final rules generally incorporate the provisions of the proposed regulations, with the following key highlights:

 

  • Employer contributions to Health Reimbursement Arrangements (HRAs), health Flexible Spending Arrangements (FSAs), and Health Savings Accounts (HSAs) are not taken into account when calculating the credit.

  • Premiums paid on behalf of a former employee may be treated as paid on behalf of an employee for purposes of calculating the credit, provided that certain conditions are met.

  • Bonuses may be included in the average annual wage calculation, to the extent they are treated as wages under Internal Revenue Code section 3121(a).

  • Even if the employer is eligible to claim the credit for only part of the first year in the two-consecutive-taxable year credit period, the filing of Form 8941 begins the first year regardless of when the employer begins offering qualified health plans through the SHOP.

  • The transition relief outlined in the proposed rules continues to be available to eligible small employers whose plan years begin on dates other than the first day of their taxable year.

 

While the final rules are applicable for taxable years beginning after 2013, employers may continue to rely on the provisions of the proposed rules for taxable years beginning after 2013, and before 2015. You may review the IRS Q&As for more information about the credit.

 

You can go to https://www.healthcare.gov/small-business-tax-credit-calculator/ to calculate possible savings.