Wipfli Alerts & Updates: Small-Employer Health Care Tax Credit Transition Rules
January 22, 2014
The Patient Protection and Affordable Care Act (PPACA) created Internal Revenue Code Section 45R, which makes available a tax credit for eligible small employers that offer health coverage to their employees. In tax years 2010 through 2013, eligible small employers could purchase coverage for their employees in the open health insurance market and be eligible for the tax credit. Self-insured plans were not and will not be eligible for the tax credit.
Starting with 2014 tax years, the credit is available only if an eligible small employer purchases the health insurance from a state-operated health insurance marketplace or the Federally Facilitated Exchange (FFE), and the credit is available only for a two-consecutive-year period. Each state insurance marketplace or FFE is required to offer group health coverage for small employers (fewer than 50 employees) under a Small Business Health Options Program (SHOP Marketplace).
The Department of Health and Human Services (HHS) has delayed online access to the SHOP Marketplace in states utilizing a federally operated insurance marketplace (FFE) until November 2014. In addition, employers residing in certain counties in the states of Washington and Wisconsin do not have insurance options available under the SHOP Marketplace operated in those states. IRS and HHS have provided some transition relief for small employers to make certain that otherwise eligible small employers will be able to take advantage of the Health Care Tax Credit.
Which Employers Qualify for the Health Care Tax Credit?
An employer is considered an “eligible small employer” [taxable employers and 501(c)(3) tax-exempt employers] with respect to a tax year if:
The employer has no more than 25 full-time equivalent (FTE) employees, excluding business owners and certain of their family members. Certain seasonal workers are also excluded;
The FTEs must have average annual wages under $50,800 for 2014; AND
The employer must pay for a uniform percentage of employees’ premiums of at least 50% of the premium.
Code Section 45(c) provides for a phase-out of the tax credit for an employer with exactly 25 FTE employees or exactly $50,800 in average annual wages, so the phase-out eliminates the credit rather quickly, making many small employers ineligible for the credit.
The maximum credit in 2014 is 50% of premiums paid for taxable employers and 35% of premiums paid for tax-exempt employers. Only employer-paid premiums are counted for the credit. Employer contributions made available through a cafeteria plan or health reimbursement arrangement or health savings account contributions are not counted as premiums for the credit. In addition, the premiums used for calculating the credit are limited to the average small-group market premium as published by HHS in the state where the employer is offering the coverage.
Tax-exempt employers claim the credit as a reduction in their payroll tax deposits for the year, so tax-exempt employers cannot claim a credit in excess of their payroll tax deposit requirements for the year (both employee and employer shares of payroll taxes).
Taxable employers’ tax credit is available only as an offset to actual tax liability and is claimed as a general business credit. It is not a refundable credit. Credit not used is eligible for a 5-year carryback or a 20-year carryforward.
IRS Form 8941 is used to calculate the Health Care Tax Credit.
How Does an Employer Purchase SHOP Health Coverage?
Under HHS regulations governing eligibility for SHOP Marketplace coverage, an employer may either:
Offer coverage to all of its eligible employees through the SHOP whose service area includes the employer’s principal business address; or
Offer coverage to each eligible employee through the SHOP whose service area includes that employee’s primary worksite.
SHOP coverage is offered by county within each state, so the employer choice of these two options will determine to which state and which county’s SHOP coverage an employer would apply for coverage.
An employer will then apply for SHOP health coverage. How an employer applies depends on the state in which the employer is applying. Seventeen states are operating their own insurance Marketplaces, and employers can apply for SHOP coverage through these state Marketplaces. These states are California, Colorado, Connecticut, District of Columbia, Hawaii, Idaho, Kentucky, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, New York, Rhode Island, Vermont, and Washington.
Seven states are partnering with the federal government, and the application for SHOP coverage is through the federal website https://www.healthcare.gov, just as with the federally operated Marketplaces (FFEs) utilized by the remaining 26 states. On November 27, 2013, HHS announced that online access to the FFE SHOP application and enrollment will not be available until November 2014.
For 2014 SHOP coverage, small employers with fewer than 50 employees can enroll their employees in health coverage through a health insurance agent, broker, or insurer that offers a certified SHOP plan in the employer’s state and county and that has agreed to conduct SHOP enrollment according to HHS standards. This is called “direct enrollment” under the HHS standards. Employers can use healthcare.gov to see information on their plan options, including which insurance companies offer SHOP plans in their area.
Direct enrollment will involve enrollment of employees by the agent, broker, or insurer and completion of a SHOP Marketplace application for the employer (or the employer can complete the application and mail it). The SHOP Marketplace will determine later (the employer does not need to qualify first) whether the business and the employees are eligible for SHOP coverage. If it is later determined the business is not eligible for SHOP coverage, the business and employees will remain covered in the chosen plan as part of the small-group health insurance market.
An employer can offer coverage through the SHOP Marketplace at any time during the year. If enrollments are submitted between the 1st and the 15th day of the month, group coverage begins on the first day of the next month. If enrollments are submitted after the 15th of the month, coverage begins the second following month.
Each state has minimum requirements for the percentage of employees who need to enroll to qualify for the SHOP coverage. Most states require that 75% of employees enroll, but employees who waive participation in writing can be excluded from the pool for calculating 75% participation.
Employers in Certain Counties in Washington and Wisconsin
IRS Notice 2014-06 provides guidance on the Health Care Tax Credit for certain small employers that cannot offer health coverage through a SHOP Marketplace because the employer’s principal business address is in a county in Washington or Wisconsin in which SHOP coverage is not available for 2014.
The affected counties are:
Washington: Adams, Asotin, Benton, Chelan, Clallam, Columbia, Douglas, Ferry, Franklin, Garfield, Grant, Grays Harbor, Island, Jefferson, King, Kitsap, Kittitas, Klickitat, Lewis, Lincoln, Mason, Okanogan, Pacific, Pend Oreille, Pierce, San Juan, Skagit, Skamania, Snohomish, Spokane, Stevens, Thurston, Wahkiakum, Walla Walla, Whatcom, Whitman, and Yakima.
Wisconsin: Green Lake, Lafayette, Marquette, Florence, and Menominee.
For small employers in these counties, the notice provides a one-year reprieve on the new requirement for the Health Care Tax Credit that the coverage must be purchased from a state SHOP Marketplace. For 2014, eligible small employers in those counties can purchase small-group coverage in the open insurance market and still take advantage of the tax credit if they otherwise qualify. The year 2014 will count as the first year of the two-consecutive-year period that a business is allowed to claim the credit.
If you need assistance determining your small business’s eligibility for the Health Care Tax Credit, please contact your Wipfli relationship executive.
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