IRS Releases Small Business Health Insurance Tax Credits Regs

The Internal Revenue Service has released final regulations for the “Tax Credit for Employee Health Insurance Expenses of Small Employers.”

The 60-page document spells out what employers must do under the Affordable Care Act (Obamacare) to receive a tax credit for health insurance they provide to their employees. The regulations affect both taxable and tax-exempt employers who may be eligible for the tax credit.

The maximum tax credit available to non-tax exempt employers is 50 percent; tax-exempt employers' maximum credit is 35 percent. The credit is available only for two successive taxable years.

Government regulations are often like a bureaucratic maze: just when you think you can do what you want, you find out you can’t because of paragraph X of subsection Y that relates back to section Z.

These new small business tax credit regulations aren’t simple and will not be easily understood by non-experts in accounting, or perhaps even the law.

An employer affected by the regulations is one with:

• 25 or fewer full-time equivalent employees (FTEs) for a taxable year
• The employer’s  average annual wages for all FTEs for the years 2010, 2011, 2012, or 2013, can’t exceed $50,00, adjusted for inflation after 2013
• A contribution arrangement with employees that meets the requirements of 26 U.S. Code § 45R (“Employee health insurance expenses of small employers”), section 45R(d)4
• Employers pay a uniform percentage of at least 50 percent of employees’ premium costs of health plan that qualifies through the SHOP (Small Business Health Options Program), assuming the employer meets all other regulations

So, how does an employer determine how many FTEs are in his or her employ, as part-time workers enter into this equation as well?  Thus, the issue becomes less one of actual bodies, and more one of hours worked.

Under the regulations, FTEs are calculated by using an approved method to add the taxable year’s total employee-worked hours, and dividing by 2,080, rounding the figure down to the next lowest whole number “except if the result is less than one the employer rounds up to one FTE.”

The IRS describes the tax credit in the following example:

"If you pay $50,000 a year toward employees’ health care premiums — and if you qualify for a 15 percent credit, you save... $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.”

However, if it were easy it wouldn’t take 60 pages of regulations to explain. If you have questions, we recommend reaching out to your tax advisor to help you navigate these regulations.