By Lauren Gardner
Publication date: 05/18/2010
The Internal Revenue Service May 17 provided comprehensive guidance (Notice 2010-44) on a small-employer tax credit included in recently enacted health care reform legislation, clarifying that the federal credit will never be reduced because an employer is receiving a state health care subsidy.
Notice 2010-44 addresses four primary issues taxpayers raised to IRS and the Treasury Department about the small business health care tax credit—the effect of state subsidies on the federal credit, how add-on insurance is treated, how to calculate the hours worked by employees, and some transition issues small businesses may face, Treasury Assistant Secretary for Tax Policy Michael Mundaca said during a teleconference with reporters.
The tax code Section 45R tax credit, which is effective for taxable years beginning in 2010 through 2013, is designed to encourage small employers to offer health coverage for the first time or to maintain coverage they already provide, the service said in an accompanying news release (IR-2010-63). The tax credit was included in the Patient Protection and Affordable Care Act (Pub. L. No. 111-148) that President Obama signed into law March 23. Both taxable employers and employers that are tax-exempt organizations may be eligible for the Section 45R credit.
IRS provided the guidance just days after the National Federation of Independent Business, along with two individuals and seven additional states, joined as plaintiffs in a constitutional challenge to the Patient Protection and Affordable Care Act. This brings the total number of states involved in the lawsuit to 20.
Three Main Qualifications for Employers
In order for an employer to qualify for the credit, it must have fewer than 25 full-time-equivalent employees (FTEs) for the taxable year; the average annual wages of its employees for the year must be less than $50,000 per FTE; and it must maintain a “qualifying arrangement” under which the employer pays a uniform percentage of at least 50 percent of the premium cost of the health coverage for each employee covered under the employer-provided insurance, IRS said in the notice. The Section 45R credit covers up to 35 percent of the premiums that eligible small businesses pay on behalf of their employees and up to 25 percent of the employer's premium payments for a tax-exempt eligible small employer.
The credit will work in two stages, with the 35 percent credit being available through 2013 as the lead-in to the establishment to the state health insurance exchanges, though it will be available for two additional years after that, Mundaca said. At that point, small employers will be expected to transition employees to the exchanges, he said.
The notice makes clear that small businesses receiving state health care tax credits may still qualify for the full federal credit, IRS said in the news release. Mundaca said the government sought to address a number of questions on this issue, by clarifying in the notice how the two subsidies would interact.
The guidance also allows businesses to receive the credit for add-on dental and vision coverage as well as for regular health insurance as long as they meet the requirements of the notice, Mundaca said. The legislation provided Treasury with the flexibility to determine what constitutes health coverage, “and it was left to us to fill in many of the definitional issues around those general terms,” he said.
Flexibility in Calculating Hours Worked
The guidance provides three methods for employers to calculate the total number of hours of service that must be taken into account for an employee for the year:
* determine actual hours of service from records of hours worked and hours for which payment is made or due, including such payment for illness, vacation, holiday, and other applicable leave of absence time;
* use a “days-worked equivalency” through which the employee is credited with eight hours of service for each day for which he or she would be required to be credited with at least one hour of service; or
* use a “weeks-worked equivalency” through which the employee is credited with 40 hours of service for each week for which he or she would be required to be credited with at least one hour of service.
Partners in a business, certain owners, and their family members are not taken into account as employees for purposes of the tax credit, IRS said in the notice. Their wages are thus disregarded in determining FTEs and average annual wages, it said, and the premiums paid on their behalf are not counted in determining the amount of the credit.
Seasonal workers are also disregarded for these purposes unless they work for the employer on more than 120 days during the taxable year, IRS said, though premiums paid on their behalf may be counted in determining the amount of the credit.
Additionally, the notice provides guidance on how to determine the number of an employer's FTEs and how to determine the employer's average annual wages for the taxable year.
Information Reporting Guidance Expected
Mundaca also said May 17 that Treasury intends to issue guidance within the next few months with respect to the interaction of a new law requiring the reporting of credit card transactions with a provision in the health reform law that requires businesses to use Form 1099 to report to IRS all payments to corporations in excess of $600 for goods or services, effective in 2012. IRS and the secretary of the treasury have the authority to prevent duplicative reporting, he said.
Rep. Dan Lungren (R-Calif.) recently said he intends to introduce legislation that would repeal the information reporting requirement included in PPACA, calling the provision an unnecessary and expensive paperwork burden on U.S. small businesses.
Mundaca said IRS and Treasury are trying to provide the clearest guidance possible to get out in front of challenges they may face in administering the credit. “We look forward to continue to engage with the small business community” and answer questions as they arise, he said.
IRS and Treasury requested in the notice that taxpayers submit comments on issues that should be addressed in future guidance that the department plans to issue on additional issues under Section 45R, such as the application of the uniformity requirement and the 50 percent requirement for taxable years beginning after 2010.
The notice will be published in Internal Revenue Bulletin 2010-22 June 1.
The complete text of this article can be found in the BNA Daily Tax Report, May 18, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today.
© 2010, The Bureau of National Affairs, Inc.
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