IRS issues rule on small-business health insurance tax credit

The Internal Revenue Service issued a final rule on tax credits intended to make it more affordable for small businesses to buy health insurance for their employees.

The rule establishes eligibility requirements for a tax credit introduced by the Patient Protection and Affordable Care Act. The credit has been available since the 2010 tax year but was implemented through IRS notices rather than formal rulemaking, according to Timothy Jost, a Washington & Lee University School of Law professor.

The final regulation, which will appear in the Federal Register on June 30, does not differ dramatically from its proposed version released last August. Eligible small employers are defined as those with no more than 25 full-time equivalent employees who have average annual wages of no more than $50,800 each. Employers must contribute at least 50% of the premium cost on behalf of each enrolled employee and in return, they can claim a tax credit of 50% of the premium amount paid.

Those looking to get the IRS credit for the 2014 tax year should know that there is an additional requirement outlined in the ACA: employers must now purchase coverage through the Small Business Health Options Program, (or "SHOP") Exchange.

“This may come as a surprise for small employers, who have not been required to go onto the SHOP Exchange to provide coverage in prior years,” said Patricia McGrath, an attorney with Devine Millimet in a note to clients. “Further, this may seem overly burdensome, since the SHOP Exchange operation has had a bumpy course, and even now is still not up-to-speed.”

The IRS will not enforce the requirement in certain counties in Washington state and Wisconsin where SHOPs were not in place in 2014.

Once a company claims the tax credit, it will only be able to continue to do so for two years. A commenter told the IRS that the two-year limit might cause some employers to discontinue contributing to employee premium coverage once the credit expires. The IRS responded that the cap is imposed by the statute.

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