Section 45R(a) provides for a health insurance tax credit for eligible small employers for any taxable year in which they have
- a qualified contribution arrangement,
- have no more than 25 full-time equivalent employees (FTEs), and
- the average annual wages of its FTEs does not exceed $25,000 (as adjusted for inflation for taxable years beginning after December 31, 2013).
A contribution arrangement qualifies if it requires an eligible small employer to make a non-elective contribution on behalf of each employee who enrolls in a qualified health plan (QHP) offered to employees by the employer through an Exchange in an amount e`qual to a uniform percentage (not less than 50 percent) of the premium cost of the QHP.
An Exchange refers to a Small Business Health Options Program (SHOP) Exchange, established pursuant to section 1311 of the Affordable Care Act and defined in 45 CFR 155.20. For purposes of the final regulations, a contribution arrangement that meets these requirements is referred to as a “qualifying arrangement.”
The amount of the credit is equal to 50 percent (35 percent in the case of a tax-exempt eligible small employer) of the lesser of:
- The aggregate amount of non-elective contributions the employer made on behalf of its employees during the taxable year under the qualifying arrangement for premiums for QHPs offered by the employer to its employees through a SHOP Exchange, or
- The aggregate amount of non-elective contributions the employer would have made during the taxable year under the arrangement if each employee taken into account under one of this sentence had enrolled in a QHP which had a premium equal to the average premium (as determined by the Secretary of Health and Human Services) for the small group market in the rating area in which the employee enrolls for coverage.
The credit is phased out when the number of FTEs is in excess of 10 and the amount by which the average annual wages exceeds $25,000 (as adjusted for inflation for taxable years beginning after December 31, 2013).
The credit amount is reduced (but not below zero) by the sum of:
- The credit amount multiplied by a fraction, the numerator of which is the total number of FTEs of the employer in excess of 10 and the denominator of which is 15, and
- The credit amount multiplied by a fraction, the numerator of which is the average annual wages of the employer in excess of the dollar amount in effect under section 45R(d)(3)(B) and the denominator of which is such dollar amount.
The average annual wages of an eligible small employer for any taxable year is the amount determined by dividing the aggregate amount of wages that were paid by the employer to employees during the taxable year by the number of FTEs of the employer and rounding such amount to the next lowest multiple of $1,000.
For taxable years beginning in or after 2014, the credit period means the two-consecutive-taxable year period beginning with the first taxable year in which the employer (or any predecessor) offers one or more QHPs to its employees through a SHOP Exchange.
For taxable years beginning in 2010, 2011, 2012, and 2013, the credit is determined without regard to whether the taxable year is in a credit period, and no credit period is treated as beginning with a taxable year beginning before 2014.
The amount of the credit is 35 percent (25 percent in the case of a tax-exempt eligible small employer) of an eligible small employer’s non-elective contributions for premiums paid for health insurance coverage of an employee. An employer does not become ineligible for the tax credit solely because it arranges for the offering of insurance outside of a SHOP Exchange.