HRB 98 - Small Business Tax Credit Final Regulations
Released August 5, 2014 I Download as a PDF
On June 30, 2014, the Internal Revenue Service issued final regulations relating to the small business tax credit (“SBTC”). As background, small businesses and tax-exempt employers that provide health care coverage to their employees under a qualified health care arrangement are entitled to a tax credit.
The final regulations adopt most of the subject matter addressed in the proposed regulations and prior issued guidance (see “Small Business Tax Credit (SBTC) Updates” in the CBIZ Health Reform Bulletin, Guidance and Updates, 9/11/13). Primarily, the final regulations address changes to the SBTC applicable in 2014 and beyond. Following are highlights of these final rules.
Eligible Employers. Employers entitled to the credit remain the same. To be eligible, the employer must employ fewer than 25 full-time equivalent employees whose average annual wages are less than $50,000 (indexed; $50,800 for 2014). Employers employing 10 or fewer full-time equivalent employees whose average annual wages are less than $25,000 (indexed; $25,400 for 2014) also qualify for the SBTC. In addition, the small employer must cover at least 50% of the cost of single (not family) health care coverage for each employee.
Qualifying Coverage. The credit is only available for qualified health plan (QHP) coverage purchased through the Small Business Health Options Program (SHOP) and is only available for 2 consecutive year period. The final regulations provide that a stand-alone dental plan offered through the SHOP is available for credit.
Amount of Credit. For tax years beginning in 2014 and beyond, the maximum credit is 50% of premiums paid by small business employer; 35% for premiums paid by small tax-exempt employers. The SBTC is limited to the average premium in the rating area in which the employee enrolls.
Uniform Contribution Requirement. To be eligible to take the SBTC, the employer must make a uniform contribution toward health coverage. The final regulations make certain clarifications relating to the uniform contribution requirement, as follows.
- Composite Billing and List Billing. The final regulations adopt the definitions of “composite billing” and “list billing” as used in prior guidance.
Composite billing refers to a billing system where the insurer charges a uniform premium for each employee or charges a single aggregate premium for a group of covered employees, the total of which is divided by the number of employees to determine the uniform billing. Under this method, if an employer offers one QHP with one level of employee-only coverage, the uniform percentage requirement is met if the employer pays at least 50% of premium for employee-only coverage for each enrolled employee. The final regulations also provide a calculation method to satisfy the uniform premium requirement where different tiers of coverage are available at different premium cost.
List billing refers to a system wherein the insurer lists a separate premium for each employee based on age or other factors. Under this method where an employer offers employee-only coverage, the uniform percentage requirement can be met in one of two ways; either:
- The employer pays up to 50% of premium per employee, or
- The employer utilizes an “employer-computed composite rate”. In this method, if an employee contribution is required for employee-only coverage, each enrolled employee would pay no more than 50% of the composite rate for such coverage.
These rules also address variances in calculating uniform percentage contributions when both a composite and list billing applies, when the coverage is tiered and when multiple QHPs are involved.
- The final regulations affirm that employer contributions to a health reimbursement arrangement (HRA), a health flexible spending arrangement (FSA plan) or a health savings account (HSA) are not taken into account for purposes of determining premium payments by the employer when calculating the credit.
- An employer need not offer SHOP dependent coverage but if it does, the premium paid for the SHOP dependent coverage is counted in determining the amount of the SBTC. SHOP dependent coverage is available to domestic partners, civil union partners, and their dependents. An employer’s contribution, or lack thereof, will not jeopardize the employer’s uniform percentage standard.
- Tobacco Surcharge. A tobacco surcharge imposed by a QHP that the employer pays is not included in premium for purposes of satisfying the uniform premium requirement nor does it count as premium payment for purposes of claiming the credit.
- Wellness programs. Any additional employer contribution attributable to an employee's participation in a wellness program is not counted in the uniform percentage calculation. This is true whether the difference is due to a discount for participation or a surcharge for non-participation in the wellness program. The employer contribution for non-participating employees must be at least 50% of the premium (including any premium surcharge for nonparticipation). However, for purposes of computing the credit, the employer contributions are taken into account, including those contributions attributable to an employee's participation in a wellness program.
Claiming the Credit. Beginning in 2014, an employer may claim the credit for two consecutive taxable years, beginning with the first tax year in or after 2014 in which the employer attaches Form 8941, Credit for Small Employer Health Insurance Premiums, to its income tax return. A tax-exempt employer would attach the Form 8941 to its Form 990-T, Exempt Organization Business Income Tax Return.
On July 25, 2014, the IRS issued a draft Form 8941 to be used to claim the credit in 2014. This version of the form includes some statutory changes applicable to the 2014 tax year. It is important to note that this version is only a draft and subject to change.
Transition rules. The final regulations affirm the proposed transition relief rules for obtaining the credit in instances in which the employer’s plan year differs from the tax year (see Transition Relief in the prior CBIZ Health Reform Bulletin).
Effective date. The final regulations are effective June 30, 2014. However, employers may rely on the proposed regulations for taxable years beginning after 2013 and before 2015.
Additional IRS Information and Resources:
· IRS webpage: Small Business Health Care Tax Credit for Small Employers
· Questions and Answers
· SBTC Estimator (calculator)
About the Author: Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc. She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law. Ms. McLeese is based in the CBIZ Leawood, Kansas office.
The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. The information contained herein is not intended to replace or substitute for accounting or other professional advice. Attorneys or tax advisors must be consulted for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.