By Ken Berry
Not all of the key provisions in the Patient Protection and Affordable Care Act (PPACA) – the 2010 health care legislation often referred to as "Obamacare" – take effect in the future. Small businesses may already be eligible for a special tax credit for providing health insurance. After issuing guidance on the credit in the form of several notices the past few years, the IRS has now released new proposed regulations summarizing the rules.
The basic premise is relatively straightforward. A qualified small business can use the tax credit to offset the cost of health insurance coverage provided to employees. The tax law defines a small business for this purpose as one with fewer than twenty-five employees with average annual wages of less than $50,000 per employee. For 2010 through 2013, the credit was equal to 35 percent of the nonelective contributions made on behalf of employees (25 percent for tax-exempt organizations). Beginning in 2014, the maximum credit increases to 50 percent (35 percent for tax-exempt organizations).
Following are several key rules, including some new modifications, incorporated into the proposed regulations.
Eligible participants: Under the regulations, an employer that otherwise meets the eligibility requirements can claim the credit for employees who aren't performing services in a trade or business, such as a household employee. Eligible small employers located outside the United States that have income connected with a trade or business in the United States may claim the credit only if the employer pays premiums for health insurance coverage issued in and regulated by one of the fifty states or the District of Columbia. Sole proprietors, partners in a partnership, 2 percent or more owners of S corporations, and any 5 percent or more business owners, and their family members, don't count as employees for purposes of the credit.
Qualifying arrangements: To qualify for a credit, an employer must pay premiums for each employee enrolled in health insurance coverage in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost. If an employer is entitled to a state tax credit or a premium subsidy, this amount isn't included in determining whether the employer has passed the test, but it is taken into account in calculating the credit.
State exchanges: Beginning in 2014, employers must obtain health insurance through a Small Business Health Options Program (SHOP), which is a state-run insurance exchange designed to accommodate these entities. These exchanges hadn't been set up in the past, so employers could previously qualify for the credit using insurance obtained outside an exchange.
Two-year limit: Previously, there was no time limit on taking the credit. Beginning in 2014, however, a two-year limit applies after the first year the employer files Form 8941, Credit for Small Employer Health Insurance Premiums. Employers claiming the credit prior to 2014 can still take the credit for two more years in 2014 and later. If an entity's predecessor entity claimed the credit in the past, the predecessor's period will count toward the two-year credit period for the successor.
Transitional rules: Finally, the new regulations provide transitional rules for employers that do not operate on a calendar-year basis. For instance, if an employer's tax year begins after January 1, 2014, but before January 1, 2015, it may be eligible for a credit if certain requirements are met.
The new regulations are effective immediately, but taxpayers may rely on them for tax years beginning after 2013. Contact your small business clients well in advance of January 1 to firm up plans for maximizing the credit and coping with other provisions in Obamacare.