IRS Finalizes Regulations for Health Insurance Tax Credits for Small Employers

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The Internal Revenue Service has issued final regulations on the tax credit available to certain small employers that offer health insurance coverage to their employees under the Affordable Care Act.

According to the original law, the final regulations in TD 9672 state that an eligible small employer is defined as an employer who has a maximum of 25 full-time equivalent employees during the taxable year. Additionally, their employees must have average annual wages that do not exceed $50,000 per full-time equivalent employee, adjusted for inflation in years after 2013. The employer must also have a qualifying arrangement in place that obligates them to pay a uniform percentage of at least 50 percent of the premium cost for a qualified health plan offered through a Small Business Health Options Program (SHOP) Exchange. The final regulations, which are consistent with the proposed regulations, also specify that employees, based on the common law standard, who perform services for the employer during the taxable year will generally be considered when calculating the number of full-time equivalent employees and average annual wages.

When determining the number of full-time equivalents (FTEs), the regulations state that FTEs should be calculated by adding up the total hours worked during the year (using one of three acceptable methods) and then dividing that number by 2,080. If the resulting number is not a whole number, it is rounded down to the nearest whole number, unless the result is less than one, in which case the employer rounds up to one FTE.

The last set of rules also state that if premiums are paid on behalf of a previous employee, they can be considered as being paid on behalf of a current employee when calculating the credit. However, in order to be treated this way, the former employee must also be considered an employee for meeting the uniform percentage requirement.

In line with the suggested rules, the ultimate regulations state that an employee’s yearly hours of service encompass the periods for which the employee receives payment or has the right to receive payment for carrying out duties for the employer within the employer’s taxable year. The final regulations also outline three approaches for computing the overall number of hours of service for employees within the taxable year.

A person who left a comment on the suggested rules asked for employees of educational institutions to be recognized for the time they work during breaks in employment. This is because using a 12-month period to measure the hours of service for employees who only work during the active parts of the academic year might lead to them not being considered as full-time employees. The IRS stated that they did not accept this suggestion in the final rules because it goes against the structure outlined in Section 45R, which calculates based on Full-Time Equivalents (FTEs) rather than full-time employees. Wages, as specified in the final regulations (and the proposed regulations), refer to amounts that are considered as wages under Section 3121(a) for FICA purposes, without taking into account the Social Security wage base limitation. In order to compute the average annual FTE wages, an employer needs to calculate the total wages paid to all employees throughout the taxable year, divide this total by the number of FTEs, and if the outcome is not a multiple of $1,000, round it down to the nearest lower multiple of $1,000.

A different commenter asked for further explanation in the last regulations about whether bonuses are considered in calculating the average annual wage. The proposed and final regulations state that the average annual wage limit is determined by using the definition of wages as stated in Section 3121(a), without taking into account the Social Security wage limitation in Section 3121(a)(1). Consequently, bonuses would be included in the calculation if they are categorized as wages under Section 3121(a) for FICA purposes.

 

Frequently Asked Questions

What is the purpose of the final regulations issued by the Internal Revenue Service?

The final regulations issued by the IRS pertain to the tax credit available to specific small employers providing health insurance coverage under the Affordable Care Act.

How are full-time equivalent employees (FTEs) calculated based on the final regulations?

FTEs are calculated by summing the total hours worked during the year (using acceptable methods) and dividing by 2,080. If the result isn’t a whole number, round down to the nearest whole number, unless it’s less than one, in which case the employer rounds up to one FTE.

Can premiums paid on behalf of previous employees count towards the tax credit calculation for current employees?

Yes, premiums paid for former employees can be considered for current employees in the credit calculation, provided the former employee meets the uniform percentage requirement and is treated as an employee.

Are bonuses included in calculating the average annual wage for the purpose of the tax credit?

Yes, bonuses are included in calculating the average annual wage if they are categorized as wages under Section 3121(a) for FICA purposes, as stated in both the proposed and final regulations.

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