March 15, 2014

By Karen Dunn, JD, LLM

Some small employers are finding themselves in a conundrum in 2014. This year, premiums eligible for the small business health care tax credit must be for qualified health plans (QHP) offered through a Small Business Health Options Program (SHOP) Exchange. However, some counties in some states do not yet offer such plans. What can these employers do?

Beginning in 2010, the credit was designed to encourage small businesses to offer health insurance coverage to employees.   The credit could cover up to 25% of the cost of health insurance premiums paid by a tax exempt employer. For 2014 and 2015, the maximum credit for exempt organizations increases to 35%. So this is an important cost savings for small tax exempt employers.

There is now some relief for employers operating in counties where QHPs are not available. In a January notice the IRS provided guidance on how such employers can meet the requirements for the credit. This transition relief allows the credit for an otherwise eligible small employer if:

  • its principal business is in a county with no available QHPs, and
  • the coverage would have qualified for a credit under the old rules (applicable before January 1, 2014).

This applies to health plan years beginning in 2014 including any portion of the plan year that continues into 2015 and only for two consecutive years.

The IRS notice lists the counties to which this relief applies.

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 counties.

Wisconsin: Green Lake, Lafayette, Marquette, Florence, and Menominee counties.

Who may qualify for the credit?

To be eligible for the credit employers must:

  • have no more than 25 full time equivalent employees,
  • pay less than $50,000 in average wages (total annual wages divided by full-time equivalent employees during the year), and
  • beginning in 2014, pay premiums for SHOP QHPs (except employers, in the counties named above, that meet the requirements in the January notice).

The credit phases out gradually for employers with average wages between $25,000 and

$50,000 or those that have between 10 and 25 full-time employees. Thus the maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees that pay annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more. Because the eligibility rules are based in part on the number of FTEs, and not simply the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals.

Note that the credit is refundable for tax exempt employers, so even if an organization has no income tax liability, it may be eligible to receive the credit as a refund so long as it does not exceed the organization’s income tax withholding and Medicare tax liability.

Transitional relief for employers with tax years different from plan years.

A small employer with a health plan year that begins on a date in 2014 other than the first day of the employer’s taxable year may be eligible to take the credit for the entire taxable year if certain criteria are met. The criteria are as follows:

  • as of August 26, 2013, the small employer offers coverage for a plan year that begins on a date other than the first day of its taxable year,
  • the employer offers coverage during the period before the first day of the plan year beginning in 2014 that would have qualified the employer for the credit under the old rules (pre-2014), and either
    • the employer begins offering coverage through a SHOP Exchange as of the first day of its plan year that begins in 2014, or
    • if the employer is in one of the counties listed above, it continues offering coverage that would have qualified under the pre-2014 rules.

For example, an eligible small employer has a tax year that ends December 31, 2014, and health plan year that begins April 1, 2014 and ends March 31, 2015. The employer’s principal business address is in one of the counties listed above. The employer provided health insurance coverage during 2014 and through March 31, 2015 that would have qualified the employer for a credit under the rules prior to 2014. The employer can claim the credit at the 35% rate for the entire 2014 taxable year and for its 2015 taxable year through March of 2015.

For additional information about how to claim the credit, read this article on IRS reporting .

© Clark Nuber PS, 2014. All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.