Healthcare reform and the small employer tax credit

Houchens-PaulThe Internal Revenue Service (IRS) has recently published guidance as a proposed rule on the tax credit that is available for small employers (fewer than 25 full-time employees) that will offer or are offering health insurance coverage under the Patient Protection and Affordable Care Act (ACA). This tax credit, under new tax code section 45R, is a sliding scale for purchasing health insurance for employees.

Beginning in 2014, the tax credit will only be available on the Small Business Health Options Program (SHOP) exchange and is equal to 50% of the employer contributions (35% for small employers eligible to be tax-exempt). It should be noted that on September 26th, the Department of Health and Human Services (HHS) announced that the enrollment functions of the federal SHOP exchange will be delayed until November 1.

To qualify for this tax credit, small employers must meet the following criteria:

• Employees’ average annual wages must be less than $50,000. Employers with 10 or fewer employees and average annual wages of less than $25,000 (adjusted for inflation for taxable years beginning after December 31, 2013) will qualify for the full tax credit.
• Employers must contribute at least 50% of the total premium cost or 50% of a benchmark premium.

The final IRS rule is expected to be published after December 31, 2013, but the IRS provides a transition period, allowing employers to rely on the “proposed” rule for taxable years beginning after December 31, 2013, and before December 31, 2014.

The number of small businesses applying for the small group tax credit to date has been less than expected, causing some to speculate that determining qualification for the small group tax credit has been overly complicated. The Milliman HCR Dashboard, a new tool specifically for brokers, insurers, and advisors serving the small and mid-size group market, can determine if a small group may qualify for the tax credit based on census, premium, and employee contribution data. The HCR Dashboard also estimates the amount of the credit, making adjustments for group’s average salary, location, number of employees, premium amounts, and tax status. While small businesses still need to seek assistance from a qualified tax advisor when applying for the small group tax credit, results from the HCR Dashboard can provide an indication of whether such assistance should be sought as part of a complete healthcare reform analysis for a small employer.