Tax Credit for Employee Health Insurance Expenses of Small Employers, 52719-52733 [2013-20769]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 78, Number 165 (Monday, August 26, 2013)]
[Proposed Rules]
[Pages 52719-52733]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-20769]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-113792-13]
RIN 1545-BL55


Tax Credit for Employee Health Insurance Expenses of Small 
Employers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations provide guidance 
on the tax credit available to certain small employers that offer 
health insurance coverage to their employees under section 45R of the 
Internal Revenue Code (Code), enacted by the Patient Protection and 
Affordable Care Act. These proposed regulations affect certain taxable 
employers and certain tax-exempt employers.

DATES: Comments and request for a public hearing must be received by 
November 25, 2013.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-113792-13), Internal 
Revenue Service, room 5205, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR 
(REG-113792-13), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC, or sent electronically via the 
Federal eRulemaking Portal at http:www.regulations.gov (IRS113792-13).

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
call Stephanie Caden at (202) 927-9639; concerning submission of 
comments, and/or to request a hearing, Oluwafunmilayo Taylor at (202) 
622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    Section 45R of the Internal Revenue Code (Code) offers a tax credit 
to certain

[[Page 52720]]

small employers that provide insured health coverage to their 
employees. Section 45R was added to the Code by section 1421 of the 
Patient Protection and Affordable Care Act, enacted March 23, 2010, 
Public Law No. 111-148 (as amended by section 10105(e) of the Patient 
Protection and Affordable Care Act, which was amended by the Health 
Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 
Stat. 1029)) (collectively, the ``Affordable Care Act'').

I. Section 45R

    Section 45R(a) provides for a health insurance tax credit in the 
case of an eligible small employer for any taxable year in the credit 
period. Section 45R(d) provides that in order to be an eligible small 
employer with respect to any taxable year, an employer must have in 
effect a contribution arrangement that qualifies under section 
45R(d)(4) and must have no more than 25 full-time equivalent employees 
(FTEs), and the average annual wages of its FTEs must not exceed an 
amount equal to twice the dollar amount determined under section 
45R(d)(3)(B). The amount determined under section 45R(d)(3)(B) is 
$25,000 (as adjusted for inflation for taxable years beginning after 
December 31, 2013).
    Section 45R(d)(4) states that a contribution arrangement qualifies 
if it requires an eligible small employer to make a nonelective 
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 equal to a uniform percentage (not less than 50 
percent) of the premium cost of the QHP (referred to in this preamble 
as the uniform percentage requirement). For purposes of section 45R, 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 this preamble and the 
proposed regulations, a contribution arrangement that meets these 
requirements is referred to as a ``qualifying arrangement.'' See also 
the section of this preamble entitled ``Explanation of Provisions.''
    Section 45R(b) provides that, subject to the reductions described 
in section 45R(c), 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: (1) The aggregate amount of nonelective 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 (2) the aggregate 
amount of nonelective contributions the employer would have made during 
the taxable year under the arrangement if each employee taken into 
account under: (1) 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. Section 45R(c) phases 
out the credit based upon the number of the employer's FTEs 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 pursuant to section 45R(d)(3)(B)). Specifically, section 
45R(c) provides that the credit amount determined under section 45R(b) 
is reduced (but not below zero) by the sum of: (1) The credit amount 
determined under section 45R(b) 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 (2) the credit amount 
determined under section 45R(b) 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. Section 45R(d)(3) provides that 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.
    Section 45R(e)(2) provides that 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, section 
45R(g) provides that 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 nonelective 
contributions for premiums paid for health insurance coverage (within 
the meaning of section 9832(b)(1)) of an employee. Section 45R(g)(3) 
provides that an employer does not become ineligible for the tax credit 
solely because it arranges for the offering of insurance outside of a 
SHOP Exchange.
    The Treasury Department and the IRS have published two notices 
addressing the application of section 45R. Each notice provides 
guidance that taxpayers may rely upon for taxable years beginning 
before January 1, 2014. See Notice 2010-44 (2010-22 IRB 717 (June 10, 
2010)) and Notice 2010-82 (2010-51 IRB 857 (December 20, 2010)). Notice 
2010-44 also provided transition relief for taxable years beginning in 
2010 with respect to the requirements for a qualifying arrangement 
under section 45R.

II. Notice 2010-44

    Notice 2010-44 addresses the eligibility requirements for employers 
to claim the credit, provides guidance on how to calculate and claim 
the credit, and explains the effect on estimated tax, alternative 
minimum tax, and deductions. The notice specifically describes the 
rules for how employees are taken into account in determining an 
employer's FTEs, average wages, and premiums paid, with certain 
individuals excluded and with employees of certain related employers 
included.

III. Notice 2010-82

    Notice 2010-82 expands on the guidance provided in Notice 2010-44 
and provides additional guidance on determining whether to take into 
account spouses and leased employees (as defined in section 414(n)) in 
computing an employer's FTEs, average annual wages, and premiums paid. 
The notice provides that employer contributions to health reimbursement 
arrangements (HRAs), health flexible spending arrangements (FSAs), and 
health savings accounts (HSAs) are not taken into account for purposes 
of the section 45R credit. The notice further explains the requirement 
that an eligible small employer must pay a uniform percentage (not less 
than 50 percent) of the premium for each employee enrolled in health 
insurance coverage offered by the employer. The notice provides rules 
for applying the uniform percentage requirement in taxable years 
beginning after December 31, 2009 and prior to 2014, and further 
provides that for taxable years beginning in 2010, an employer may 
satisfy the uniform percentage requirement either by meeting the 
requirements provided in Notice 2010-82 or by meeting the transition 
relief rules provided in Notice 2010-44. With respect to calculating 
the credit, the notice provides guidance on

[[Page 52721]]

small group markets, taxpayers with employees in multiple States, the 
application of the average premium cap, and taxpayers with fiscal 
taxable years.

Explanation of Provisions

    These proposed regulations generally incorporate the provisions of 
Notice 2010-44 and Notice 2010-82 as modified to reflect the 
differences between the statutory provisions applicable to years before 
2014 and those applicable to years after 2013. As in Notices 2010-44 
and 2010-82, these proposed regulations use the term ``qualifying 
arrangement'' to describe an arrangement under which an eligible small 
employer pays premiums for each employee enrolled in health insurance 
coverage offered by the employer in an amount equal to a uniform 
percentage (not less than 50 percent) of the premium cost of the 
coverage. Section 45R(d)(4) and these proposed regulations require 
that, for tax years beginning during or after 2014, the health 
insurance coverage described in a qualifying arrangement be a QHP 
offered by an employer to its employees through a SHOP Exchange (but 
see section II.I of this preamble for a description of certain 
transition guidance for 2014).

I. Eligibility for the Credit

A. Eligible Small Employer Defined
    Section 45R and these proposed regulations provide that an eligible 
small employer is defined as an employer that has no more than 25 FTEs 
for the taxable year, whose employees have average annual wages of less 
than $50,000 per FTE (as adjusted for inflation for years after 
December 31, 2013), and that has a qualifying arrangement in effect 
that requires the employer to pay a uniform percentage (not less than 
50 percent) of the premium cost of a QHP offered by the employer to its 
employees through a SHOP Exchange. A tax-exempt eligible small employer 
is an eligible small employer that is described in section 501(c) and 
that is exempt from tax under section 501(a). An employer that is an 
agency or instrumentality of the Federal government, or of a State, 
local or Indian tribal government, is not an eligible small employer 
for purposes of section 45R unless it is an organization described in 
section 501(a) (and otherwise meets the requirements for an eligible 
small employer). However, a farmers' cooperative described in section 
521 that is subject to tax pursuant to section 1381 and otherwise meets 
the requirements of this section is an eligible small employer.
    Section 45R does not require that, in order for an employer to be 
an eligible small employer, the employees perform services in a trade 
or business. Thus, an employer that otherwise meets the requirements 
for the section 45R credit does not fail to be an eligible small 
employer merely because the employees of the employer are not 
performing services in a trade or business. For example, a household 
employer that otherwise satisfies the requirements of section 45R is an 
eligible small employer for purposes of the credit.
    An employer located outside the United States (including a U.S. 
Territory) may be an eligible small employer if the employer has income 
effectively connected with the conduct of a trade or business in the 
United States, otherwise meets the requirements of this section and is 
able to offer a QHP to its employees through a SHOP Exchange.
B. Application of Section 414 Aggregation Rules
    In accordance with section 45R(e)(5), these proposed regulations 
provide that all employers treated as a single employer under section 
414(b), (c), (m), or (o) are treated as a single employer for purposes 
of section 45R. Thus, for example, all employees of the employers 
treated as a single employer are counted in computing the single 
employer's FTEs and average annual wages. This applies to employers 
that are corporations in a controlled group of corporations, employers 
that are members of an affiliated service group, and employers that are 
partnerships, sole proprietorships, etc. under common control under 
section 414(c). Section 414 also applies to tax-exempt eligible small 
employers under common control. See Sec.  1.414(c)-5.
C. Determining Employees Taken Into Account
    The proposed rules for determining employees taken into account are 
the same as those in the previous notices. In general, all employees 
(determined under the common law standard) who perform services for the 
employer during the taxable year are taken into account in determining 
FTEs and average annual wages, including those who are not performing 
services in the employer's trade or business. (But see special rules 
for seasonal employees described in this section of the preamble.) 
However, section 45R and these proposed regulations provide that 
certain individuals are not considered employees when calculating the 
credit, and hours and wages of these individuals are not counted when 
determining an employer's eligibility for the credit. The following 
individuals are not employees or are otherwise excluded for this 
purpose: independent contractors (including sole proprietors); partners 
in a partnership; shareholders owning more than two percent of an S 
corporation; owners of more than five percent of other businesses; 
family members of these owners and partners, including a child (or 
descendant of a child), a sibling or step sibling, a parent (or 
ancestor of a parent), a step-parent, a niece or nephew, an aunt or 
uncle, or a son-in-law, daughter-in-law, father-in-law, mother-in-law, 
brother-in-law, or a sister-in-law. A spouse is also considered a 
family member for this purpose, as is a member of the household who is 
not a family member but qualifies as a dependent on the individual 
income tax return of an excluded individual.
    Section 45R(d)(5) and these proposed regulations provide that 
seasonal employees who work for 120 or fewer days during the taxable 
year are not considered employees when determining FTEs and average 
annual wages, but premiums paid on behalf of seasonal workers may be 
counted in determining the amount of the credit. Seasonal workers 
include retail workers employed exclusively during holiday seasons and 
workers employed exclusively during the summer.
    Compensation paid to a minister performing services in the exercise 
of his or her ministry generally is subject to tax under the Self-
Employment Contributions Act (SECA) and not under the Federal Insurance 
Contributions Act (FICA), whether the minister is an employee or self-
employed under the common law. See sections 1402(c)(2)(d), 1402(c)(4), 
and 3121(b)(8)(A). For purposes of income taxes generally, including 
the credit under section 45R, whether a minister is an employee is 
determined under the common law standard for determining worker status. 
If under the common law a minister is not an employee, the minister is 
not taken into account in determining an employer's FTEs. If under the 
common law a minister is an employee, the minister is taken into 
account in determining an employer's FTEs. However, because a minister 
performing services in the exercise of his or her ministry is treated 
as not engaged in employment for purposes of FICA, compensation paid to 
a minister is not wages as defined under section 3121(a), and so is not 
included for purposes of computing an employer's average annual wages.

[[Page 52722]]

D. Determining Hours of Service
    These proposed regulations provide that an employee's hours of 
service for a year include hours for which the employee is paid, or 
entitled to payment, for the performance of duties for the employer 
during the employer's taxable year. Hours of service also include hours 
for which the employee is paid for vacation, holiday, illness, 
incapacity (including disability), layoff, jury duty, military duty, or 
leave of absence. Hours of service do not include the hours of seasonal 
employees who work for 120 or fewer days during the taxable year, nor 
do they include hours worked for a year in excess of 2,080 for a single 
employee.
    These proposed regulations describe three methods for calculating 
the total number of hours of service for a single employee for the 
taxable year: actual hours worked; days-worked equivalency; and weeks-
worked equivalency. Employers need not use the same method for all 
employees and may apply different methods for different classifications 
of employees if the classifications are reasonable and consistently 
applied. For example, an employer may use the actual hours worked 
method for all hourly employees and the weeks-worked equivalency method 
for all salaried employees. These proposed rules are the same as those 
in the previous notices.
E. Determining FTEs
    In accordance with section 45R(d)(2), these proposed regulations 
provide that FTEs are calculated by computing the total hours of 
service for the taxable year using a method described in section 1.D of 
this preamble, and dividing the total hours of service by 2,080. If the 
result is not a whole number (0, 1, 2, etc.), the result is rounded 
down to the next lowest whole number. The only exception to this rule 
is when the result is less than one; in this case, the employer rounds 
up to one FTE. In some circumstances, an employer with 25 or more 
employees may qualify for the credit if some of its employees work less 
than full-time. For example, an employer with 46 employees that each 
are paid wages for 1,040 hours per year has 23 FTEs and, therefore, may 
qualify for the credit. These proposed rules are the same as those in 
the previous notices.
F. Determining Average Annual FTE Wages
    In accordance with section 45R(e)(4), these proposed regulations 
define wages, for purposes of the credit, as wages defined under 
section 3121(a) for purposes of FICA, determined without considering 
the social security wage base limitation. To calculate average annual 
FTE wages, an employer must figure the total wages paid during the 
taxable year to all employees, divide the total wages paid by the 
number of FTEs, and if the result is not a multiple of $1,000, round 
the result to the next lowest multiple of $1,000. For example, $30,699 
is rounded down to $30,000. But see special rules for seasonal 
employees described in section I.C of this preamble. These proposed 
rules are the same as those in the previous notices.

II. Calculating the Credit

A. Maximum Credit
    Under section 45R and these proposed regulations, for taxable years 
beginning during or after 2014, the maximum credit for an eligible 
small employer other than a tax-exempt eligible small employer is 50 
percent of the eligible small employer's premium payments made on 
behalf of its employees under a qualifying arrangement for QHPs offered 
through a SHOP Exchange. For a tax-exempt eligible small employer for 
those years, the maximum credit is 35 percent. The employer's tax 
credit is subject to several adjustments and limitations as set forth 
in this preamble.
B. Average Premium Limitation
    Under section 45R and these proposed regulations, for purposes of 
calculating the credit for taxable years beginning after 2013, the 
employer's premium payments are limited by the average premium in the 
small group market in the rating area in which the employee enrolls for 
coverage through a SHOP Exchange. The credit will be reduced by the 
excess of the credit calculated using the employer's premium payments 
over the credit calculated using the average premium. For example, if 
an employer pays 50 percent of the $7,000 premium for family coverage 
for its employees ($3,500), but the average premium for family coverage 
in the small group market in the rating area in which the employees 
enroll is $6,000, for purposes of calculating the credit the employer's 
premium payments are limited to 50 percent of $6,000 ($3,000).
C. Credit Phaseout
    Under section 45R and these proposed regulations, the credit phases 
out for eligible small employers if the number of FTEs exceeds 10, or 
if the average annual wages for FTEs exceed $25,000 (as adjusted for 
inflation for taxable years beginning after December 31, 2013). For an 
employer with both more than 10 FTEs and average annual FTE wages 
exceeding $25,000, the credit will be reduced based on the sum of the 
two reductions. This may reduce the credit to zero for some employers 
with fewer than 25 FTEs and average annual FTE wages of less than 
double the $25,000 dollar amount (as adjusted for inflation).
D. State Subsidy and Tax Credit Limitation
    Some States offer tax credits to a small employer that provides 
health insurance to its employees. Some of these credits are refundable 
credits and others are nonrefundable credits. In addition, some States 
offer premium subsidy programs for certain small employers under which 
the State makes a payment equal to a portion of the employees' health 
insurance premiums. Generally, the State pays this premium subsidy 
either directly to the employer or to the employer's insurance company 
(or another entity licensed under State law to engage in the business 
of insurance).
    Under these proposed regulations, and consistent with previous 
notices, if the employer is entitled to a State tax credit or premium 
subsidy that is paid directly to the employer, the amount of employer 
premiums paid is not reduced for purposes of calculating the section 
45R credit, but the amount of the credit cannot exceed the net premiums 
paid, which are the employer premiums paid minus the amount of any 
State tax credits or premium subsidies received. If a State makes 
premium payments directly to the insurance company, the State is 
treated as making these payments on behalf of the employer for purposes 
of determining whether the employer has satisfied the ``qualifying 
arrangement'' requirement to pay an amount equal to a uniform 
percentage (not less than 50 percent) of the premium cost of coverage. 
Also, these premium payments by the State are treated as an employer 
contribution under section 45R for purposes of calculating the credit, 
but the amount of the credit cannot exceed the premiums actually paid 
by the employer. Finally, if a State-administered program, such as 
Medicaid, makes payments on behalf of individuals and their families 
who meet certain eligibility requirements, these payments do not reduce 
the amount of employer premiums paid for purposes of calculating the 
credit.

[[Page 52723]]

E. Payroll Tax Limitation for Tax-Exempt Employers
    Section 45R and these proposed regulations define the term 
``payroll taxes'' as (1) amounts required to be withheld under section 
3402 \1\ and (2) the employee's and employer's shares of Medicare tax 
required to be withheld and paid under sections 3101(b) and 3111(b) on 
employees' wages for the year. For a tax-exempt eligible small 
employer, the amount of the credit cannot exceed the amount of the 
payroll taxes of the employer during the calendar year in which the 
taxable year begins.
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    \1\ Although section 45R(f)(3)(A)(i) cites to section 3401(a)(1) 
as imposing the obligation on employers to withhold income tax from 
employees, it is actually section 3402 that imposes the withholding 
obligation. We have cited to section 3402 throughout this preamble 
and in the proposed regulation.
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F. Two-Consecutive-Taxable Year Credit Period Limitation
    These proposed regulations provide that the first year for which an 
eligible small employer files Form 8941, ``Credit for Small Employer 
Health Insurance Premiums,'' claiming the credit, or files Form 990-T, 
``Exempt Organization Business Income Tax Return,'' with an attached 
Form 8941, is the first year of the two-consecutive-taxable year credit 
period. Even if the employer is only eligible to claim the credit for 
part of the first year, the filing of Form 8941 begins the first year 
of the two-consecutive-taxable year credit period. For application of 
the two-consecutive-taxable year credit period under the transition 
relief related to taxable years beginning in 2014, see Sec.  1.45R-3(i) 
of these proposed regulations and section II.I of the Explanation of 
Provisions section of this preamble.
    Section 45R(i) provides that regulations shall be prescribed as 
necessary to prevent the avoidance of the two-year limit on the credit 
period through the use of successor entities and the avoidance of the 
credit phaseout limitations through the use of multiple entities. For 
purposes of identifying successor entities, these proposed regulations 
generally apply the rules for identifying successor employers 
applicable under the employment tax provisions for determining when 
wages paid by a predecessor may be attributed to a successor employer 
(see Sec.  31.3121(a)(1)-1(b)). Accordingly, under the proposed 
regulations, an entity that would be treated as a successor employer 
for employment tax purposes will also be treated as a successor 
employer for purposes of the two-consecutive-taxable year credit period 
under section 45R. Therefore, if the predecessor employer had 
previously claimed the credit under section 45R for a period, that 
period will count towards the successor employer's two-consecutive-
taxable year credit period.
G. Premium Payments by the Employer
    In general, only premiums paid by the employer for employees 
enrolled in a QHP offered through a SHOP Exchange are counted when 
calculating the credit.\2\ If the employer pays a portion of the 
premiums and the employees pay the rest, only the portion paid by the 
employer is taken into account. For this purpose, any premium paid 
through a salary reduction arrangement under a section 125 cafeteria 
plan is not treated as an employer-paid premium. Premiums paid with 
employer-provided flex credits that employees may elect to receive as 
cash or as a taxable benefit are treated as paid pursuant to a salary 
reduction arrangement under a section 125 cafeteria plan. See Notice 
2012-40 (2012-26 IRB 1046 (June 25, 2012)). The proposed regulations 
further provide that amounts made available by an employer under or 
contributed by an employer to HRAs, FSAs and HSAs are not taken into 
account for purposes of determining premium payments by the employer.
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    \2\ In general a stand-alone dental health plan will be 
considered a qualifed health plan. Patient Protection and Affordable 
Care Act; Establishment of Exchanges and Qualified Health Plans; 
Exchange Standards for Employers, 77 Fed. Reg. 18310, 18315 (March 
27, 2012).
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    The proposed regulations provide that if a minister is a common law 
employee and is taken into account in an employer's FTEs, the premiums 
paid by the employer for health insurance may be counted in calculating 
the credit.
    A leased employee is defined in section 414(n)(2) as a person who 
is not an employee of the service recipient and who provides services 
to the service recipient pursuant to an agreement with the leasing 
organization. The person must have performed services for the service 
recipient on a substantially full-time basis for a period of at least 
one year under the primary direction and control of the service 
recipient. Leased employees are counted in computing a service 
recipient's FTEs and average annual wages. See section 45R(e)(1)(B).
    See section II.I of this preamble for special rules related to 
taxable years beginning in 2014.
H. Trusts, Estates, Regulated Investment Companies, Real Estate 
Investment Trusts and Cooperative Organizations
    Section 45R(e)(5)(B) provides that rules similar to the rules of 
section 52(c), (d) and (e) will apply. Because section 45R(f) 
explicitly provides that a tax-exempt eligible small employer may be 
eligible for the credit, these proposed regulations do not adopt a rule 
similar to section 52(c). However, these proposed regulations provide 
that rules similar to the rules of section 52(d) and (e) and the 
regulations thereunder apply in calculating and apportioning the credit 
with respect to trusts, estates, regulated investment companies, real 
estate investment trusts, and cooperative organizations.
I. Transition Rules
    If an eligible small employer's plan year begins on a date other 
than the first day of its taxable year, it may not be practical or 
possible for the employer to offer insurance to its employees through a 
SHOP Exchange at the beginning of its first taxable year beginning in 
2014. These proposed regulations provide that if: (1) As of August 26, 
2013, a small employer offers coverage in a plan year that begins on a 
date other than the first day of its taxable year, (2) 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 rules otherwise applicable to the period before January 1, 
2014, and (3) the employer begins offering coverage through a SHOP 
Exchange as of the first day of its plan year that begins in 2014, then 
it will be treated as offering coverage through a SHOP Exchange for its 
entire 2014 taxable year for purposes of eligibility for, and 
calculation of, a credit under section 45R. Thus, for an employer that 
meets these requirements, the credit will be calculated at the 50 
percent rate (35 percent rate for tax-exempt eligible small employers) 
for the entire 2014 taxable year and the 2014 taxable year will be the 
start of the two-consecutive-taxable year credit period.

III. Application of Uniform Percentage Requirement

A. Uniform Premium
    Section 45R and these proposed regulations require that to be 
eligible for the credit, an eligible small employer must generally pay 
a uniform percentage (not less than 50 percent) of the premium for each 
employee enrolled in a QHP offered to its employees through a SHOP 
Exchange. These proposed regulations set forth rules for applying this 
requirement in

[[Page 52724]]

separate situations depending upon (1) whether the premium established 
for the QHP is based upon list billing or is based upon composite 
billing, (2) whether the QHP offers only self-only coverage, or other 
coverage (such as family coverage) for which a higher premium is 
charged, and (3) whether the employer offers one QHP or more than one 
QHP. The uniform percentage rule applies only to the employees offered 
coverage and does not impose a coverage requirement.
B. Composite Billing and List Billing
    These proposed regulations define the term ``composite billing'' to 
mean a system of billing under which a health insurer charges a uniform 
premium for each of the employer's employees or charges a single 
aggregate premium for the group of covered employees that the employer 
may then divide by the number of covered employees to determine the 
uniform premium. In contrast, the term ``list billing'' is defined as a 
billing system under which a health insurer lists a separate premium 
for each employee based on the age of the employee or other factors.
C. Employers Offering One QHP
    For an employer offering one QHP under a composite billing system 
with one level of self-only coverage, these proposed regulations 
provide that the uniform percentage requirement is met if an eligible 
small employer pays the same amount for each employee enrolled in 
coverage and that amount is equal to at least 50 percent of the premium 
for self-only coverage. For employers offering one QHP under a 
composite billing system with different tiers of coverage (for example, 
self-only, self plus one, and family coverage) for which different 
premiums are charged, the uniform percentage requirement is satisfied 
if the eligible small employer either: (1) Pays the same amount for 
each employee enrolled in that tier of coverage and that amount is 
equal to at least 50 percent of the premium for that tier of coverage, 
or (2) pays an amount for each employee enrolled in the more expensive 
tiers of coverage that is the same for all employees and is no less 
than the amount that the employer would have contributed toward self-
only coverage for that employee (and is equal to at least 50 percent of 
the premium for self-only coverage).
    For an employer offering one QHP under a list billing system that 
offers only self-only coverage, the uniform percentage requirement is 
satisfied if the eligible small employer either: (1) Pays an amount 
equal to a uniform percentage (not less than 50 percent) of the premium 
charged for each employee, or (2) determines an ``employer-computed 
composite rate'' and, if any employee contribution is required, each 
enrolled employee pays a uniform amount toward the self-only premium 
that is no more than 50 percent of the employer-computed composite rate 
for self-only coverage. The proposed regulations define ``employer-
computed composite rate'' as the average rate determined by adding the 
premiums for that tier of coverage for all employees eligible to 
participate in the employer's health insurance plan (whether or not the 
eligible employee enrolls in coverage under the plan or in that tier of 
coverage under the plan) and dividing by the total number of such 
eligible employees.
    For eligible small employers offering one QHP under list billing 
with different tiers of coverage for which different premiums are 
charged, the uniform percentage requirement is satisfied if the 
eligible small employer pays toward the premium for each employee 
covered under each tier of coverage an amount equal to or exceeding the 
amount the employer would have contributed with respect to that 
employee for self-only coverage, calculated either based on the actual 
premium that would have been charged by the insurer for that employee 
for self-only coverage, or based on the employer-computed composite 
rate for self-only coverage, and the employer premium payments within 
the same tier are uniform in percentage or amount. Alternatively, the 
eligible small employer may satisfy the uniform percentage requirement 
by meeting the uniform percentage requirement separately for each tier 
of coverage and substituting the employer-computed composite rate for 
that tier of coverage for the employer-computed composite rate for 
self-only coverage.
    The proposed regulations provide examples of how the uniform 
percentage requirement is applied in all of these situations.
D. Employers Offering More Than One Plan
    As set forth in these proposed regulations, if an employer offers 
more than one QHP through a SHOP Exchange, the uniform percentage 
requirement may be satisfied in one of two ways. The first is on a 
plan-by-plan basis, meaning that the employer's premium payments for 
each plan must individually satisfy the uniform percentage requirement 
stated above. The amounts or percentages of premiums paid toward each 
QHP do not have to be the same, but they must each satisfy the uniform 
percentage requirement if each QHP is tested separately. The other 
permissible method to satisfy the uniform percentage requirement is 
through the reference plan method. Under the reference plan method, the 
employer designates one of its QHPs as a reference plan. Then the 
employer either determines a level of employer contributions for each 
employee such that, if all eligible employees enrolled in the reference 
plan, the contributions would satisfy the uniform percentage 
requirement as applied to that reference plan, or the employer allows 
each employee to apply the minimum amount of employer contribution 
determined necessary to meet the uniform percentage requirement toward 
the reference plan or toward coverage under any other available QHP.
E. Employers Complying With State Law
    The Treasury Department and the IRS understand that at least one 
State requires employers to contribute a certain percentage (50%) to an 
employee's premium cost, but also requires that the employee's 
contribution not exceed a certain percentage of monthly gross earnings 
so that, in some instances, the employer's required contribution for a 
particular employee may exceed 50 percent of the premium.\3\ To satisfy 
the uniform percentage requirement under section 45R, that employer 
generally would be required to increase the employer contribution to 
all its employees' premiums to match the increase for that one 
employee, which may be difficult especially if the percentage increase 
is substantial. Accordingly, for taxable years beginning in 2014, an 
employer will be treated as meeting the uniform percentage requirement 
if the failure to satisfy the uniform percentage requirement is 
attributable to additional employer contributions made to certain 
employees solely to comply with an applicable State or local law.
---------------------------------------------------------------------------

    \3\ See Hawaii Prepaid Health Care Act, Hawaii Revised Statutes 
Chapter 393 (1974).
---------------------------------------------------------------------------

IV. Claiming the Credit

A. Form 8941, Credit for Small Employer Health Insurance Premiums
    For an eligible small employer that is not a tax-exempt eligible 
small employer, the credit is calculated on Form 8941, ``Credit for 
Small Employer Health Insurance Premiums,'' and can be applied against 
both regular and alternative minimum tax. For tax-exempt eligible small 
employers, the credit is also calculated on Form 8941

[[Page 52725]]

and attached to Form 990-T, ``Exempt Organization Business Income Tax 
Return.'' Filing Form 990-T with an attached Form 8941 is required for 
a tax-exempt eligible small employer to claim the credit, even if it is 
not otherwise required to file Form 990-T.
B. Estimated Tax Payments and Alternative Minimum Tax (AMT) Liability
    These proposed regulations provide that the section 45R credit may 
be reflected in an eligible small employer's estimated tax payments in 
accordance with the estimated tax rules. The credit can also be used to 
offset an eligible small employer's AMT liability for the year, subject 
to certain limitations based on the amount of an employer's regular tax 
liability, AMT liability and other allowable credits. See section 
38(c)(1), as modified by section 38(c)(4)(B)(vi), for these 
limitations.
C. Reduced Section 162 Deduction
    No deduction is allowed under section 162 for that portion of the 
premiums paid equal to the amount of the credit claimed under section 
45R. See section 280C(h).

Proposed Effective/Applicability Dates

    These regulations are proposed to be effective the date the final 
regulations are published in the Federal Register, and apply to taxable 
years beginning after December 31, 2013. To assist with any preparation 
needed for transition to the requirements applicable to taxable years 
beginning after December 31, 2014, employers may also rely on these 
proposed regulations for guidance for taxable years beginning after 
December 31, 2013, and before December 31, 2014. If and to the extent 
future guidance is more restrictive than the guidance in these proposed 
regulations, the future guidance will be applied without retroactive 
effect and employers will be provided with time to come into compliance 
with the final regulations (and will in any case not be required to 
comply for taxable years beginning prior to January 1, 2015).

Availability of IRS Documents

    IRS notices cited in this preamble are made available by the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations.
    It is hereby certified that this regulation will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required. While 
the number of small entities affected is substantial, the economic 
impact on the affected small entities is not significant. The 
information required to determine a small employer's eligibility for, 
and amount of, an applicable credit, generally consisting of the annual 
hours worked by its employees, the annual wages paid to its employees, 
the cost of the employees' premiums for qualified health plans and the 
employer's contribution towards those premiums, is information that the 
small employer generally will retain for business purposes and be 
readily available to accumulate for purposes of completing the 
necessary form for claiming the credit. In addition, this credit is 
available to any eligible small employer only twice (because the credit 
can be claimed by a small employer only for two consecutive taxable 
years beginning after December 31, 2013, beginning with the taxable 
year for which the small employer first claims the credit). 
Accordingly, no small employer will calculate the credit amount or 
complete the process for claiming the credit under this regulation more 
than two times.
    Based on these facts, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are timely submitted 
to the IRS as prescribed in this preamble under the ``Addresses'' 
heading. The IRS and the Treasury Department request comments on all 
aspects of the proposed rules. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written or 
electronic comments. If a public hearing is scheduled, notice of the 
date, time, and place for the hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these proposed regulations is Stephanie 
Caden, Office of the Division Counsel/Associate Chief Counsel (Tax 
Exempt and Government Entities). However, other personnel from the IRS 
and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART I--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read as 
follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.45R-0 is added to read as follows:

Sec.  1.45R-0 Table of Contents

    This section lists the table of contents for Sec. Sec.  1.45R-1 
through 1.45R-5.

Sec.  1.45R-1 Definitions.
    (a) Definitions.
    (1) Average premium.
    (2) Composite billing.
    (3) Credit period.
    (4) Eligible small employer.
    (5) Employee.
    (6) Employer-computed composite rate.
    (7) Exchange.
    (8) Family member.
    (9) Full-time equivalent employee (FTE).
    (10) List billing.
    (11) Net premium payments.
    (12) Nonelective contribution.
    (13) Payroll taxes.
    (14) Qualified health plan QHP.
    (15) Qualifying arrangement.
    (16) Seasonal worker.
    (17) Small Business Health Options Program (SHOP).
    (18) State.
    (19) Tax-exempt eligible small employer.
    (20) Tier.
    (21) United States.
    (22) Wages.
    (b) Effective/applicability date.
Sec.  1.45R-2 Eligibility for the credit.
    (a) Eligible small employer.
    (b) Application of section 414 employer aggregation rules.
    (c) Employees taken into account.
    (d) Determining the hours of service performed by employees.
    (1) In general.
    (2) Permissible methods.
    (3) Examples.
    (e) FTE calculation.
    (1) In general.
    (2) Example.

[[Page 52726]]

    (f) Determining the employer's average annual wages.
    (1) In general.
    (2) Example.
    (g) Effective/applicability date.
Sec.  1.45R-3 Calculating the credit.
    (a) In general.
    (b) Average premium limitation.
    (1) In general.
    (2) Examples.
    (c) Credit phaseout.
    (1) In general.
    (2) $25,000 dollar amount adjusted for inflation.
    (3) Examples
    (d) State credits and subsidies for health insurance.
    (1) Payments to employer.
    (2) Payments to issuer.
    (3) Credits may not exceed net premium payment.
    (4) Examples.
    (e) Payroll tax limitation for tax-exempt eligible small 
employers.
    (1) In general.
    (2) Example.
    (f) Two-consecutive-taxable year credit period limitation.
    (g) Premium payments by the employer for a taxable year.
    (1) In general.
    (2) Excluded amounts.
    (h) Rules applicable to trusts, estates, regulated investment 
companies, real estate investment trusts and cooperative 
organizations.
    (i) Transition rule for 2014.
    (1) In general.
    (2) Example.
    (j) Effective/applicability date.
Sec.  1.45R-4 Uniform percentage of premium paid.
    (a) In general.
    (b) Employers offering one QHP.
    (1) Employers offering one QHP, self-only coverage, composite 
billing.
    (2) Employers offering one QHP, other tiers of coverage, 
composite billing.
    (3) Employers offering one QHP, self-only coverage, list 
billing.
    (4) Employers offering one QHP, other tiers of coverage, list 
billing.
    (c) Employers offering more than one QHP.
    (1) QHP-by-QHP method.
    (2) Reference QHP method.
    (d) Special rules regarding employer compliance with applicable 
State and local law.
    (e) Examples.
    (f) Effective/applicability date.
Sec.  1.45R-5 Claiming the credit.
    (a) Claiming the credit.
    (b) Estimated tax payments and alternative minimum tax (AMT) 
liability.
    (c) Reduction of section 162 deduction.
    (d) Effective/applicability date.

0
Par. 3. Sections 1.45R-1, 1.45R-2, 1.45R-3, 1.45R-4 and 1.45R-5 are 
added to read as follows:


Sec.  1.45R-1  Definitions.

    (a) Definitions. The definitions in this section apply to this 
section and Sec. Sec.  1.45R-2, 1.45R-3, 1.45R-4, and 1.45R-5.
    (1) Average premium. The term average premium means an average 
premium for the small group market in the rating area in which the 
employee enrolls for coverage. The average premium for the small group 
market in a rating area is determined by the Secretary of Health and 
Human Services.
    (2) Composite billing. The term composite billing means a system of 
billing under which a health insurer charges a uniform premium for each 
of the employer's employees or charges a single aggregate premium for 
the group of covered employees that the employer then divides by the 
number of covered employees to determine the uniform premium.
    (3) Credit period--(i) In general. The term credit period means, 
with respect to any eligible small employer (or any predecessor 
employer), the two-consecutive-taxable year period beginning with the 
first taxable year beginning after December 31, 2013, for which the 
eligible small employer files an income tax return with an attached 
Form 8941, ``Credit for Small Employer Health Insurance Premiums'' (or 
files a Form 990-T, ``Exempt Organization Business Income Tax Return,'' 
with an attached Form 8941 in the case of a tax-exempt eligible 
employer). For a transition rule for 2014, see Sec.  1.45R-3(i).
    (ii) Examples. The following examples illustrate the provisions of 
paragraph (a)(3)(i) of this section:

    Example 1. (i) Facts. In 2014, an eligible small employer 
(Employer) that uses a calendar year as its taxable year begins to 
offer insurance through a SHOP Exchange. Employer has 4 employees 
and otherwise qualifies for the credit, but none of the employees 
enroll in the coverage offered by Employer through the SHOP 
Exchange. In mid-2015, the 4 employees enroll for coverage through 
the SHOP Exchange but Employer does not file Form 8941 or claim the 
credit. In 2016, Employer has 20 employees and all are enrolled in 
coverage offered through the SHOP Exchange. Employer files Form 8941 
with Employer's 2016 tax return to claim the credit.
    (ii) Conclusion. Employer's taxable year 2016 is the first year 
of the credit period. Accordingly, Employer's two-year credit period 
is 2016 and 2017.
    Example 2. (i) Facts. Same facts as Example 1, but Employer 
files Form 8941 with Employer's 2015 tax return.
    (ii) Conclusion. Employer's taxable year 2015 is the first year 
of the credit period. Accordingly, Employer's two-year credit period 
is 2015 and 2016 (and does not include 2017). Employer is entitled 
to a credit based on a partial year of SHOP Exchange coverage for 
Employer's taxable year 2015.

    (4) Eligible small employer. (i) The term eligible small employer 
means an employer that meets the requirements set forth in Sec.  1.45R-
2.
    (ii) For the definition of tax-exempt eligible small employer, see 
paragraph (a)(19) of this section.
    (iii) A farmers' cooperative described under section 521 that is 
subject to tax pursuant to section 1381, and otherwise meets the 
requirements of this paragraph (a)(4) and Sec.  1.45R-2, is an eligible 
small employer.
    (5) Employee--(i) In general. Except as otherwise specifically 
provided in this paragraph (a)(5), the term employee means an 
individual who is an employee of the eligible small employer under the 
common law standard. See Sec.  31.3121(d)-1(c).
    (ii) Leased employees. For purposes of this paragraph (a)(5), the 
term employee also includes a leased employee (as defined in section 
414(n)).
    (iii) Certain individuals excluded. The term employee does not 
include independent contractors (including sole proprietors), partners 
in a partnership, shareholders owning more than two percent of an S 
corporation, and any owners of more than five percent of other 
businesses. The term employee also does not include family members of 
these owners and partners including the employee-spouse of a 
shareholder owning more than two percent of the stock of an S 
corporation, the employee-spouse of an owner of more than five percent 
of a business, the employee-spouse of a partner owning more than a five 
percent interest in a partnership, and the employee-spouse of a sole 
proprietor.
    (iv) Seasonal employees. The term employee does not include 
seasonal workers unless the seasonal worker provides services to the 
employer on more than 120 days during the taxable year.
    (v) Dependents. The term employee does not include any other member 
of the household of owners and partners who qualifies as a dependent 
under section 152(d)(2)(H).
    (vi) Ministers. Whether a minister is an employee is determined 
under the common law standard for determining worker status. If, under 
the common law standard, a minister is not an employee, the minister is 
not an employee for purposes of this paragraph (a)(5) and is not taken 
into account in determining an employer's FTEs, and premiums paid for 
the minister's health insurance coverage are not taken into account in 
computing the credit. If, under the common law standard, a minister is 
an employee, the minister is an employee for purposes of this paragraph 
(a)(5), and is taken into account in determining an employer's FTEs, 
and premiums paid

[[Page 52727]]

by the employer for the minister's health insurance coverage can be 
taken into account in computing the credit. Because the performance of 
services by a minister in the exercise of his or her ministry is not 
treated as employment for purposes of the Federal Insurance 
Contributions Act (FICA), compensation paid to the minister is not 
wages as defined under section 3121(a), and is not counted as wages for 
purposes of computing an employer's average annual wages.
    (6) Employer-computed composite rate. The term employer-computed 
composite rate refers to a rate for a tier of coverage (such as self-
only or family) of a QHP that is the average rate determined by adding 
the premiums for that tier of coverage for all employees eligible to 
participate in the QHP (whether or not they actually receive coverage 
under the plan or under that tier of coverage) and dividing by the 
total number of such eligible employees. The employer-computed 
composite rate is used in list billing to convert individual premiums 
for a tier of coverage into an employer-computed composite rate for 
that tier of coverage.
    (7) Exchange. The term Exchange means an exchange as defined in 45 
CFR 155.20.
    (8) Family member. The term family member is defined with respect 
to a taxpayer as a child (or descendant of a child); a sibling or step-
sibling; a parent (or ancestor of a parent); a step-parent; a niece or 
nephew; an aunt or uncle; or a son-in-law, daughter-in-law, father-in-
law, mother-in-law, brother-in-law or sister-in-law. A spouse of any of 
these family members is also considered a family member.
    (9) Full-time equivalent employee (FTE). The number of full-time 
equivalent employees (FTEs) is determined by dividing the total number 
of hours of service for which wages were paid by the employer to 
employees during the taxable year by 2,080. See Sec.  1.45-2(d) and (e) 
for permissible methods of calculating hours of service and the method 
for calculating the number of an employer's FTEs.
    (10) List billing. The term list billing refers to a system of 
billing under which a health insurer lists a separate premium for each 
employee based on the age of the employee or other factors.
    (11) Net premium payments. The term net premium payments means, in 
the case of an employer receiving a State tax credit or State subsidy 
for providing health insurance to its employees, the excess of the 
employer's actual premium payments over the State tax credit or State 
subsidy received by the employer. In the case of a State payment 
directly to an insurance company (or another entity licensed under 
State law to engage in the business of insurance), the employer's net 
premium payments are the employer's actual premium payments. If a 
State-administered program (such as Medicaid or another program that 
makes payments directly to a health care provider or insurance company 
on behalf of individuals and their families who meet certain 
eligibility guidelines) makes payments that are not contingent on the 
maintenance of an employer-provided group health plan, those payments 
are not taken into account in determining the employer's net premium 
payments.
    (12) Nonelective contribution. The term nonelective contribution 
means an employer contribution other than a contribution pursuant to a 
salary reduction arrangement under section 125.
    (13) Payroll taxes. For purposes of section 45R, the term payroll 
taxes means amounts required to be withheld as tax from the employees 
of a tax-exempt eligible small employer under section 3402, amounts 
required to be withheld from such employees under section 3101(b), and 
amounts of tax imposed on the tax-exempt eligible small employer under 
section 3111(b).
    (14) Qualified health plan (QHP). The term qualified health plan 
(QHP) means a qualified health plan as defined in Affordable Care Act 
section 1301(a) (see 42 U.S.C. 18021(a)), but does not include a 
catastrophic plan described in Affordable Care Act section 1302(e) (See 
42 U.S.C. 18022(e)).
    (15) Qualifying arrangement. The term qualifying arrangement means 
an arrangement that requires an eligible small employer to make a 
nonelective contribution on behalf of each employee who enrolls in a 
QHP offered to employees by the employer through a SHOP Exchange in an 
amount equal to a uniform percentage (not less than 50 percent) of the 
premium cost of the QHP.
    (16) Seasonal worker. The term seasonal worker means a worker who 
performs labor or services on a seasonal basis as defined by the 
Secretary of Labor, including (but not limited to) workers covered by 
29 CFR 500.20(s)(1), and retail workers employed exclusively during 
holiday seasons.
    (17) Small Business Health Options Program (SHOP). The term Small 
Business Health Options Program (SHOP) means an Exchange established 
pursuant to section 1311 of the Affordable Care Act and defined in 45 
CFR 155.20.
    (18) State. The term State means a State as defined in section 
7701(a)(10), including the District of Columbia.
    (19) Tax-exempt eligible small employer. The term tax-exempt 
eligible small employer means an eligible small employer that is exempt 
from federal income tax under section 501(a) as an organization 
described in section 501(c).
    (20) Tier. The term tier refers to a category of coverage under a 
benefits package that varies only by the number of individuals covered. 
For example, self-only coverage, self plus one coverage, and family 
coverage would constitute three separate tiers of coverage.
    (21) United States. The term United States means United States as 
defined in section 7701(a)(9).
    (22) Wages. The term wages for purposes of section 45R means wages 
as defined under section 3121(a) for purposes of the Federal Insurance 
Contributions Act (FICA), determined without regard to the social 
security wage base limitation under section 3121(a)(1).
    (b) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  1.45R-2  Eligibility for the credit.

    (a) Eligible small employer. To be eligible for the credit, an 
employer must be an eligible small employer. In order to be an eligible 
small employer, with respect to any taxable year, an employer must have 
no more than 25 full-time equivalent employees (FTEs), must have in 
effect a qualifying arrangement, and the average annual wages of its 
FTEs must not exceed an amount equal to twice the dollar amount in 
effect under Sec.  1.45R-3(c)(2). To claim the credit for taxable years 
beginning in or after 2014, the qualifying arrangement is an 
arrangement that requires an employer to make a nonelective 
contribution on behalf of each employee who enrolls in a qualified 
health plan (QHP) offered to employees through a small business health 
options program (SHOP) Exchange in an amount equal to a uniform 
percentage (not less than 50 percent) of the premium cost of the QHP. 
Notwithstanding the foregoing, an employer that is an agency or 
instrumentality of the federal government, or of a State, local or 
Indian tribal government, is not an eligible small employer unless it 
is an organization described in section 501(c) that is exempt from tax 
under section 501(a). An employer does not fail to be an eligible small 
employer merely because its employees are not performing services in a 
trade or business of the employer. An employer

[[Page 52728]]

located outside the United States (including a U.S. Territory) must 
have income effectively connected with the conduct of a trade or 
business in the United States, and otherwise meet the requirements of 
this section, to be an eligible small employer. For eligibility 
standards for SHOP related to foreign employers, see 45 CFR 155.710. 
Paragraphs (b) through (f) of this section provide the rules for 
determining whether the requirements to be an eligible small employer 
are met, including rules related to identifying and counting the 
employer's number of the employer's FTEs, counting the employees' hours 
of service, and determining the employer's average annual FTE wages for 
the taxable year. For rules on determining whether the uniform 
percentage requirement is met, see Sec.  1.45R-4.
    (b) Application of section 414 employer aggregation rules. All 
employers treated as a single employer under section 414(b), (c), (m) 
or (o) are treated as a single employer for purposes of this section. 
Thus, all employees of a controlled group under section 414(b), (c) or 
(o), or an affiliated service group under section 414(m), are taken 
into account in determining whether any member of the controlled group 
or affiliated service group is an eligible small employer. Similarly, 
all wages paid to, and premiums paid for, employees by the members of 
the controlled group or affiliated service group are taken into account 
when determining the amount of the credit for a group treated as a 
single employer under these rules.
    (c) Employees taken into account. To be eligible for the credit, an 
employer must have employees as defined in Sec.  1.45R-1(a)(5) during 
the taxable year. All employees of the eligible small employer are 
taken into account for purposes of determining the employer's FTEs and 
average annual FTE wages. Employees include former employees who 
terminated employment during the year for which the credit is being 
claimed, employees covered under a collective bargaining agreement, and 
employees who do not enroll in a QHP offered by the employer through a 
SHOP Exchange.
    (d) Determining the hours of service performed by employees--(1) In 
general. An employee's hours of service for a year include each hour 
for which an employee is paid, or entitled to payment, for the 
performance of duties for the employer during the employer's taxable 
year. It also includes each hour for which an employee is paid, or 
entitled to payment, by the employer on account of a period of time 
during which no duties are performed due to vacation, holiday, illness, 
incapacity (including disability), layoff, jury duty, military duty or 
leave of absence (except that no more than 160 hours of service are 
required to be counted for an employee on account of any single 
continuous period during which the employee performs no duties).
    (2) Permissible methods. In calculating the total number of hours 
of service that must be taken into account for an employee during the 
taxable year, eligible small employers need not use the same method for 
all employees, and may apply different methods for different 
classifications of employees if the classifications are reasonable and 
consistently applied. Eligible small employers may change the method 
for calculating employees' hours of service for each taxable year. An 
eligible small employer may use any of the following three methods.
    (i) Actual hours worked. An employer may use the actual hours of 
service provided by employees including hours worked and any other 
hours for which payment is made or due (as described in paragraph 
(d)(1) of this section).
    (ii) Days-worked equivalency. An employer may use a days-worked 
equivalency whereby the employee is credited with 8 hours of service 
for each day for which the employee would be required to be credited 
with at least one hour of service under paragraph (d)(1) of this 
section.
    (iii) Weeks-worked equivalency. An employer may use a weeks-worked 
equivalency whereby the employee is credited with 40 hours of service 
for each week for which the employee would be required to be credited 
with at least one hour of service under paragraph (d)(1) of this 
section.
    (3) Examples. The following examples illustrate the rules of 
paragraph (d) of this section:

    Example 1. Counting hours of service by hours actually worked or 
for which payment is made or due. (i) Facts. An eligible small 
employer (Employer) has payroll records that indicate that Employee 
A worked 2,000 hours and that Employer paid Employee A for an 
additional 80 hours on account of vacation, holiday and illness. 
Employer uses the actual hours worked method described in paragraph 
(d)(2)(i) of this section.
    (ii) Conclusion. Under this method of counting hours, Employee A 
must be credited with 2,080 hours of service (2,000 hours worked and 
80 hours for which payment was made or due).
    Example 2. Counting hours of service under days-worked 
equivalency. (i) Facts. Employee B worked from 8:00 a.m. to 12:00 
p.m. every day for 200 days. Employer uses the days-worked 
equivalency method described in paragraph (d)(2)(ii) of this 
section.
    (ii) Conclusion. Under this method of counting hours, Employee B 
must be credited with 1,600 hours of service (8 hours for each day 
Employee B would otherwise be credited with at least 1 hour of 
service x 200 days).
    Example 3. Counting hours of service under weeks-worked 
equivalency. (i) Facts. Employee C worked 49 weeks, took 2 weeks of 
vacation with pay, and took 1 week of leave without pay. Employer 
uses the weeks-worked equivalency method described in paragraph 
(d)(2)(iii) of this section.
    (ii) Conclusion. Under this method of counting hours, Employee C 
must be credited with 2,040 hours of service (40 hours for each week 
during which Employee C would otherwise be credited with at least 1 
hour of service x 51 weeks).
    Example 4. Excluded employees. (i) Facts. Employee D worked 3 
consecutive weeks at 32 hours per week during the holiday season. 
Employee D did not work during the remainder of the year. Employee E 
worked limited hours after school from time to time through the year 
for a total of 350 hours. Employee E does not work through the 
summer. Employer uses the actual hours worked method described in 
paragraph (d)(2)(i) of this section.
    (ii) Conclusion. Employee D is a seasonal employee who worked 
for 120 days or less for Employer during the year. Employee D's 
hours are not counted when determining the hours of service of 
Employer's employees. Employee E works throughout most of the year 
and is not a seasonal employee. Employer counts Employee E's 350 
hours of service during the year.

    (e) FTE Calculation--(1) In general. The number of an employer's 
FTEs is determined by dividing the total hours of service, determined 
in accordance with paragraph (d) of this section, credited during the 
year to employees taken into account under paragraph (c) of this 
section (but not more than 2,080 hours for any employee) by 2,080. The 
result, if not a whole number, is then rounded to the next lowest whole 
number. If, however, after dividing the total hours of service by 
2,080, the resulting number is less than one, the employer rounds up to 
one FTE.
    (2) Example. The following example illustrates the provisions of 
paragraph (e) of this section:

    Example. Determining the number of FTEs. (i) Facts. A sole 
proprietor pays 5 employees wages for 2,080 hours each, pays 3 
employees wages for 1,040 hours each, and pays 1 employee wages for 
2,300 hours. One of the employees working 2,080 hours is the sole 
proprietor's nephew. The sole proprietor's FTEs would be calculated 
as follows: 8,320 hours of service for the 4 employees paid for 
2,080 hours each (4 x 2,080); the sole proprietor's nephew is 
excluded from the FTE calculation; 3,120 hours of service for the 3 
employees paid for 1,040 hours each (3 x 1,040); and 2,080 hours of 
service for the 1 employee paid for 2,300 hours (lesser of 2,300 and 
2,080). The sum of the included hours of service equals 13,520 hours 
of service.

[[Page 52729]]

    (ii) Conclusion. The sole proprietor's FTEs equal 6 (13,520 
divided by 2,080 = 6.5, rounded to the next lowest whole number).

    (f) Determining the employer's average annual FTE wages--(1) In 
general. All wages paid to employees (including overtime pay) are taken 
into account in computing an eligible small employer's average annual 
FTE wages. The average annual wages paid by an employer for a taxable 
year is determined by dividing the total wages paid by the eligible 
small employer during the employer's taxable year to employees taken 
into account under paragraph (c) of this section by the number of the 
employer's FTEs for the year. The result is then rounded down to the 
nearest $1,000 (if not otherwise a multiple of $1,000). For purposes of 
determining the employer's average annual wages for the taxable year, 
only wages that are paid for hours of service determined under 
paragraph (d) of this section are taken into account.
    (2) Example. The following example illustrates the provision of 
paragraphs (e) and (f) of this section:

    Example. (i) Facts. An employer has 26 FTEs with average annual 
wages of $23,000. Only 22 of the employer's employees enroll for 
coverage offered by the employer through a SHOP Exchange.
    (ii) Conclusion. The hours of service and wages of all employees 
are taken into consideration in determining whether the employer is 
an eligible small employer for purposes of the credit. Because the 
employer does not have fewer than 25 FTEs for the taxable year, the 
employer is not an eligible small employer for purposes of this 
section, even if less than 25 employees (or FTEs) enroll for 
coverage through the SHOP Exchange.

    (g) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  1.45R-3  Calculating the credit.

    (a) In general. The tax credit available to an eligible small 
employer equals 50 percent of the eligible small employer's premium 
payments made on behalf of its employees under a qualifying 
arrangement, or in the case of a tax-exempt eligible small employer, 
equals 35 percent of the employer's premium payments made on behalf of 
its employees under a qualifying arrangement. The employer's tax credit 
is subject to the following adjustments and limitations:
    (1) The average premium limitation for the small group market in 
the rating area in which the employee enrolls for coverage, described 
in paragraph (b) of this section;
    (2) The credit phaseout described in paragraph (c) of this section;
    (3) The net premium payment limitation in the case of State credits 
or subsidies described in paragraph (d) of this section;
    (4) The payroll tax limitation for a tax-exempt eligible small 
employer described in paragraph (e) of this section;
    (5) The two-consecutive-taxable year credit period limitation, 
described in paragraph (f) of this section;
    (6) The rules with respect to the premium payments taken into 
account, described in paragraph (g) of this section;
    (7) The rules with respect to credits applicable to trusts, 
estates, regulated investment companies, real estate investment trusts 
and cooperatives described in paragraph (h) of this section; and
    (8) The transition relief for 2014 described in paragraph (i) of 
this section.
    (b) Average premium limitation--(1) In general. The amount of an 
eligible small employer's premium payments that are taken into account 
in calculating the credit is limited to the premium payments the 
employer would have made under the same arrangement if the average 
premium for the small group market in the rating area in which the 
employee enrolls for coverage were substituted for the actual premium.
    (2) Examples. The following examples illustrate the provisions of 
paragraph (b)(1) of this section:

    Example 1. Comparing premium payments to average premium for 
small group market. (i) Facts. An eligible small employer (Employer) 
offers a health insurance plan with self-only and family coverage 
through a small business options program (SHOP) Exchange. Employer 
has 9 full-time equivalent employees (FTEs) with average annual 
wages of $23,000 per FTE. All 9 employees are employees as defined 
under Sec.  1.45R-1(a)(5). Four employees are enrolled in self-only 
coverage and 5 are enrolled in family coverage. Employer pays 50% of 
the premiums for all employees enrolled in self-only coverage and 
50% of the premiums for all employees enrolled in family coverage 
(and the employee is responsible for the remainder in each case). 
The premiums are $4,000 a year for self-only coverage and $10,000 a 
year for family coverage. The average premium for the small group 
market in Employer's rating area is $5,000 for self-only coverage 
and $12,000 for family coverage. Employer's premium payments for 
each FTE ($2,000 for self-only coverage and $5,000 for family 
coverage) do not exceed 50 percent of the average premium for the 
small group market in Employer's rating area ($2,500 for self-only 
coverage and $6,000 for family coverage).
    (ii) Conclusion. The amount of premiums paid by Employer for 
purposes of computing the credit equals $33,000 ((4 x $2,000) plus 
(5 x $5,000)).
    Example 2. Premium payments exceeding average premium for small 
group market. (i) Facts. Same facts as Example 1, except that the 
premiums are $6,000 for self-only coverage and $14,000 for family 
coverage. Employer's premium payments for each employee ($3,000 for 
self-only coverage and $7,000 for family coverage) exceed 50% of the 
average premium for the small group market in Employer's rating area 
($2,500 for self-only coverage and $6,000 for family coverage).
    (ii) Conclusion. The amount of premiums paid by Employer for 
purposes of computing the credit equals $40,000 ((4 x $2,500) plus 
(5 x $6,000)).

    (c) Credit phaseout--(1) In general. The tax credit is subject to a 
reduction (but not reduced below zero) if the employer's FTEs exceed 10 
or average annual FTE wages exceed $25,000. If the number of FTEs 
exceeds 10, the reduction is determined by multiplying the otherwise 
applicable credit amount by a fraction, the numerator of which is the 
number of FTEs in excess of 10 and the denominator of which is 15. If 
average annual FTE wages exceed $25,000, the reduction is determined by 
multiplying the otherwise applicable credit amount by a fraction, the 
numerator of which is the amount by which average annual FTE wages 
exceed $25,000 and the denominator of which is $25,000. In both cases, 
the result of the calculation is subtracted from the otherwise 
applicable credit to determine the credit to which the employer is 
entitled. For an employer with both more than 10 FTEs and average 
annual FTE wages exceeding $25,000, the total reduction is the sum of 
the two reductions.
    (2) $25,000 dollar amount adjusted for inflation. For taxable years 
beginning in a calendar year after 2013, each reference to ``$25,000'' 
in paragraph (c)(1) of this section is replaced with a dollar amount 
equal to $25,000 multiplied by the cost-of-living adjustment under 
section 1(f)(3) for the calendar year, determined by substituting 
``calendar year 2012'' for ``calendar year 1992'' in section 
1(f)(3)(B).
    (3) Examples. The following examples illustrate the provisions of 
paragraph (c) this section. For purposes of these examples, no employer 
is a tax-exempt organization and no other adjustments or limitations on 
the credit apply other than those adjustments and limitations 
explicitly set forth in the example.

    Example 1. Calculating the maximum credit for an eligible small 
employer without an applicable credit phaseout. (i) Facts. An 
eligible small employer (Employer) has 9 FTEs with average annual 
wages of $23,000. Employer pays $72,000 in health insurance premiums 
for those employees (which does

[[Page 52730]]

not exceed the total average premium for the small group market in 
the rating area), and otherwise meets the requirements for the 
credit.
    (ii) Conclusion. Employer's credit equals $36,000 (50% x 
$72,000).
    Example 2. Calculating the credit phaseout if the number of FTEs 
exceeds 10 or average annual wages exceed $25,000, as adjusted for 
inflation. (i) Facts. An eligible small employer (Employer) has 12 
FTEs and average annual FTE wages of $30,000 in a year when the 
amount in paragraph (c)(1) of this section, as adjusted for 
inflation, is $25,000. Employer pays $96,000 in health insurance 
premiums for its employees (which does not exceed the average 
premium for the small group market in the rating area) and otherwise 
meets the requirements for the credit.
    (ii) Conclusion. The initial amount of the credit is determined 
before any reduction (50% x $96,000) = $48,000. The credit reduction 
for FTEs in excess of 10 is $6,400 ($48,000 x 2/15). The credit 
reduction for average annual FTE wages in excess of $25,000 is 
$9,600 ($48,000 x $5,000/$25,000), resulting in a total credit 
reduction of $16,000 ($6,400 + $9,600). Employer's total tax credit 
equals $32,000 ($48,000-$16,000).

    (d) State credits and subsidies for health insurance--(1) Payments 
to employer. If the employer is entitled to a State tax credit or a 
premium subsidy that is paid directly to the employer, the premium 
payment made by the employer is not reduced by the credit or subsidy 
for purposes of determining whether the employer has satisfied the 
requirement to pay an amount equal to a uniform percentage (not less 
than 50 percent) of the premium cost. Also, except as described in 
paragraph (d)(3) of this section, the maximum amount of the credit is 
not reduced by reason of a State tax credit or subsidy or by reason of 
payments by a State directly to an employer.
    (2) Payments to issuer. If a State makes payments directly to an 
insurance company (or another entity licensed under State law to engage 
in the business of insurance) to pay a portion of the premium for 
coverage of an employee enrolled for coverage through a SHOP Exchange, 
the State is treated as making these payments on behalf of the employer 
for purposes of determining whether the employer has satisfied the 
requirement to pay an amount equal to a uniform percentage (not less 
than 50 percent) of the premium cost of coverage. Also, except as 
described below in paragraph (d)(3) of this section, these premium 
payments by the State are treated as an employer contribution under 
this section for purposes of calculating the credit.
    (3) Credits may not exceed net premium payment. Regardless of the 
application of paragraphs (d)(1) and (d)(2) of this section, in no 
event may the amount of the credit exceed the amount of the employer's 
net premium payments as defined in Sec.  1.45R-1(a)(11).
    (4) Examples. The following examples illustrate the provisions of 
paragraphs (d)(1) through (d)(3) of this section. For purposes of these 
examples, the eligible small employer's taxable year and plan year 
begin during or after 2014. No other adjustments or limitations on the 
credit apply other than those adjustments and limitations explicitly 
set forth in the example.

    Example 1. State premium subsidy paid directly to employer. (i) 
Facts. The State in which an eligible small employer (Employer) 
operates provides a health insurance premium subsidy of up to 40% of 
the health insurance premiums for each eligible employee. The State 
pays the subsidy directly to Employer. Employer has one employee, 
Employee D. Employee D's health insurance premiums are $100 per 
month and are paid as follows: $80 by Employer and $20 by Employee D 
through salary reductions to a cafeteria plan. The State pays 
Employer $40 per month as a subsidy for Employer's payment of 
insurance premiums on behalf of Employee D. Employer is otherwise an 
eligible small employer that meets the requirements for the credit.
    (ii) Conclusion. For purposes of calculating the credit, the 
amount of premiums paid by the employer is $80 per month (the 
premium payment by the Employer without regard to the subsidy from 
the State). The maximum credit is $40 ($80 x 50%).
    Example 2. State premium subsidy paid directly to insurance 
company. (i) Facts. The State in which Employer operates provides a 
health insurance premium subsidy of up to 30% for each eligible 
employee. Employer has one employee, Employee E. Employee E is 
enrolled in self-only coverage through a qualified health plan (QHP) 
offered by Employer through a SHOP Exchange. Employee E's health 
insurance premiums are $100 per month and are paid as follows: $50 
by Employer; $30 by the State and $20 by the employee. The State 
pays the $30 per month directly to the insurance company and the 
insurance company bills Employer for the employer and employee's 
share, which equal $70 per month. Employer is otherwise an eligible 
small employer that meets the requirements for the credit.
    (ii) Conclusion. For purposes of calculating the amount of the 
credit, the amount of premiums paid by Employer is $80 per month 
(the sum of Employer's payment and the State's payment). The maximum 
credit is $40 ($80 x 50%).
    Example 3. Credit limited by employer's net premium payment. (i) 
Facts. Employer is an eligible small employer that is not a tax-
exempt organization. The State in which Employer operates provides a 
health insurance premium subsidy of up to 50% for each eligible 
employee. Employer has one employee, Employee F. Employee F is 
enrolled in self-only coverage under the QHP offered to Employee F 
by Employer through a SHOP Exchange. Employee F's health insurance 
premiums are $100 per month and are paid as follows: $20 by 
Employer; $50 by the State and $30 by Employee F. The State pays the 
$50 per month directly to the insurance company and the insurance 
company bills Employer for the employer's and employee's shares, 
which total $50 per month. Employer is otherwise an eligible small 
employer that meets the requirements for the credit. The amount of 
premiums paid by Employer (the sum of Employer's payment and the 
State's payment) is $70 per month, which is more than 50% of the 
$100 monthly premium payment. The amount of the premium for 
calculating the credit is also $70 per month.
    (ii) Conclusion. The maximum credit without adjustments or 
limitations is $35 ($70 x 50%). Employer's net premium payment is 
$20 (the amount actually paid by Employer excluding the State 
subsidy). Because the credit may not exceed Employer's net premium 
payment, the credit is $20 (the lesser of $35 or $20).

    (e) Payroll tax limitation for tax-exempt eligible small 
employers--(1) In general. For a tax-exempt eligible employer, the 
amount of the credit claimed cannot exceed the total amount of payroll 
taxes (as defined in Sec.  1.45R-1(a)(13)) of the employer during the 
calendar year in which the taxable year begins.
    (2) Example. The following example illustrates the provisions of 
paragraph (e)(1) of this section. For purposes of this example, the 
eligible small employer's taxable year and plan year begin during or 
after 2014. No other adjustments or limitations on the credit apply 
other than those adjustments and limitations explicitly set forth in 
the example.

    Example. Calculating the maximum credit for a tax-exempt 
eligible small employer. (i) Facts. Employer is a tax-exempt 
eligible small employer that has 10 FTEs with average annual wages 
of $21,000. Employer pays $80,000 in health insurance premiums for 
its employees (which does not exceed the average premium for the 
small group market in the rating area) and otherwise meets the 
requirements for the credit. The total amount of Employer's payroll 
taxes equals $30,000.
    (ii) Conclusion. The initial amount of the credit is determined 
before any reduction: (35% x $80,000) = $28,000, and Employer's 
payroll taxes are $30,000. The total tax credit equals $28,000 (the 
lesser of $28,000 and $30,000).

    (f) Two-consecutive-taxable year credit period limitation. The 
credit is only available to an eligible small employer, including a 
tax-exempt eligible small employer, during that employer's credit 
period. For a transition rule for 2014, see paragraph (i) of this 
section. To prevent the avoidance of the two-year limit on the credit 
period through the use of successor entities, a successor entity and a 
predecessor entity are treated as

[[Page 52731]]

the same employer. For this purpose, the rules for identifying 
successor entities under Sec.  31.3121(a)(1)-1(b) apply. Accordingly, 
for example, if an eligible small employer claims the credit for the 
2014 and 2015 taxable years, that eligible small employer's credit 
period will have expired so that any successor employer to that 
eligible small employer will not be able to claim the credit for any 
subsequent taxable years.
    (g) Premium payments by the employer for a taxable year--(1) In 
general. Only premiums paid by an eligible small employer or tax-exempt 
eligible small employer on behalf of each employee enrolled in a QHP or 
payments paid to the issuer in accordance with paragraph (d)(2) of this 
section are counted in calculating the credit. If an eligible small 
employer pays only a portion of the premiums for the coverage provided 
to employees (with employees paying the rest), only the portion paid by 
the employer is taken into account. Premiums paid on behalf of seasonal 
workers may be counted in determining the amount of the credit (even 
though seasonal worker wages and hours of service are not included in 
the FTE and average annual FTE wage calculation unless the seasonal 
worker works for the employer on more than 120 days during the taxable 
year).
    (2) Excluded amounts--(i) Salary reduction amounts. Any premium 
paid pursuant to a salary reduction arrangement under a section 125 
cafeteria plan is not treated as paid by the employer for purposes of 
section 45R and these regulations. For this purpose, premiums paid with 
employer-provided flex credits that employees may elect to receive as 
cash or other taxable benefit are treated as paid pursuant to a salary 
reduction arrangement under a section 125 cafeteria plan.
    (ii) HSAs, HRAs, and FSAs. Employer contributions to, or amounts 
made available under, health savings accounts, reimbursement 
arrangements, and health flexible spending arrangements are not taken 
into account in determining the premium payments by the employer for a 
taxable year.
    (h) Rules applicable to trusts, estates, regulated investment 
companies, real estate investment trusts and cooperative organizations. 
Rules similar to the rules of section 52(d) and (e) and the regulations 
thereunder apply in calculating and apportioning the credit with 
respect to a trust, estate, a regulated investment company or real 
estate investment trusts or cooperative organization.
    (i) Transition rule for 2014--(1) In general. This paragraph (i) 
applies if as of August 26, 2013 an eligible small employer offers 
coverage on a plan year that begins on a date other than the first day 
of its taxable year. In such a case, if an eligible small employer has 
a health plan year beginning after January 1, 2014 but before January 
1, 2015 (2014 health plan year) that begins after the start of its 
first taxable year beginning after January 1, 2014 (2014 taxable year), 
and the employer offers one or more QHPs to its employees through a 
SHOP Exchange as of the first day of its 2014 health plan year, then 
the eligible small employer is treated as offering coverage through a 
SHOP Exchange for its entire 2014 taxable year for purposes of section 
45R if the health care coverage provided from the first day of the 2014 
taxable year through the day immediately preceding the first day of the 
2014 health plan year would have qualified for a credit under section 
45R using the rules applicable to taxable years beginning before 
January 1, 2014. If the eligible small employer claims the section 45R 
credit in the 2014 taxable year, the 2014 taxable year begins the first 
year of the credit period.
    (2) Example. The following example illustrates the rule of 
paragraph (i) of this section. For purposes of this example, the 
eligible small employer is not a tax-exempt organization. No other 
adjustments or limitations on the credit apply other than those 
adjustments and limitations explicitly set forth in the example.

    Example. (i) Facts. An eligible small employer (Employer) has a 
2014 taxable year that begins January 1, 2014 and ends on December 
31, 2014, and a 2014 health plan year that begins July 1, 2014 and 
ends June 30, 2015. Employer offers a QHP through a SHOP Exchange 
the coverage under which begins July 1, 2014. Employer provides 
coverage from January 1, 2014 through June 30, 2014 that would have 
qualified for a credit under section 45R using the rules applicable 
to taxable years beginning before January 1, 2014.
    (ii) Conclusion. Employer may claim the credit at the 50% rate 
under section 45R for the entire 2014 taxable year using the rules 
under paragraph (i) of this section. Accordingly, in calculating the 
credit, Employer may count premiums paid for coverage from January 
1, 2014 through June 30, 2014, as well as premiums paid from July 1, 
2014 through December 31, 2014. If Employer claims the credit for 
the 2014 taxable year, that taxable year is the first year of the 
credit period.

    (j) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  1.45R-4  Uniform percentage of premium paid.

    (a) In general. An eligible small employer must pay a uniform 
percentage (not less than 50 percent) of the premium for each employee 
enrolled in a qualified health plan (QHP) offered to employees by the 
employer through a small business health options program (SHOP) 
Exchange.
    (b) Employers offering one QHP. An employer that offers a single 
QHP through a SHOP Exchange must satisfy the requirements of this 
paragraph (b).
    (1) Employers offering one QHP, self-only coverage, composite 
billing. For an eligible small employer offering self-only coverage and 
using composite billing, the employer satisfies the requirements of 
this paragraph if it pays the same amount toward the premium for each 
employee receiving self-only coverage under the QHP, and that amount is 
equal to at least 50 percent of the premium for self-only coverage.
    (2) Employers offering one QHP, other tiers of coverage, composite 
billing. For an eligible small employer offering one QHP providing at 
least one tier of coverage with a higher premium than self-only 
coverage and using composite billing, the employer satisfies the 
requirements of this paragraph (b)(2) if it either--
    (i) Pays an amount for each employee enrolled in that more 
expensive tier of coverage that is the same for all employees and that 
is no less than the amount that the employer would have contributed 
toward self-only coverage for that employee, or
    (ii) Meets the requirements of paragraph (b)(1) of this section for 
each tier of coverage that if offers.
    (3) Employers offering one QHP, self-only coverage, list billing. 
For an eligible small employer offering one QHP providing only self-
only coverage and using list billing, the employer satisfies the 
requirements of this paragraph (b)(3) if either--
    (i) The employer pays toward the premium an amount equal to a 
uniform percentage (not less than 50 percent) of the premium charged 
for each employee, or
    (ii) The employer converts the individual premiums for self-only 
coverage into an employer-computed composite rate for self-only 
coverage, and, if an employee contribution is required, each employee 
who receives coverage under the QHP pays a uniform amount toward the 
self-only premium that is no more than 50 percent of the employer-
computed composite rate for self-only coverage.

[[Page 52732]]

    (4) Employers offering one QHP, other tiers of coverage, list 
billing. For an eligible small employer offering one QHP providing at 
least one tier of coverage with a higher premium than self-only 
coverage and using list billing, the employer satisfies the 
requirements of this paragraph (b)(4) if it either--
    (i) Pays toward the premium for each employee covered under each 
tier of coverage an amount equal to or exceeding the amount that the 
employer would have contributed with respect to that employee for self-
only coverage, calculated either based upon the actual premium that 
would have been charged by the insurer for that employee for self-only 
coverage or based upon the employer-computed composite rate for self-
only coverage, or
    (ii) Meets the requirements of paragraph (b)(3) of this section for 
each tier of coverage that it offers substituting the employer-computed 
composite rate for each tier of coverage for the employer-computed 
composite rate for self-only coverage.
    (c) Employers offering more than one QHP. If an eligible small 
employer offers more than one QHP, the employer must satisfy the 
requirements of this paragraph (c). The employer may satisfy the 
requirements of this paragraph (c) in either of the following two ways:
    (1) QHP-by-QHP method. The employer makes payments toward the 
premium with respect to each QHP for which the employer is claiming the 
credit that satisfy the uniform percentage requirement under paragraph 
(b) of this section on a QHP-by-QHP basis (so that the amounts or 
percentages of premium paid by the employer for each QHP need not be 
identical, but the payments with respect to each QHP must satisfy 
paragraph (b) of this section); or
    (2) Reference QHP method. The employer designates a reference QHP 
and makes employer contributions in accordance with the following 
requirements--
    (i) The employer determines a level of employer contributions for 
each employee such that, if all eligible employees enrolled in the 
reference QHP, the contributions would satisfy the uniform percentage 
requirement under paragraph (b) of this section, or
    (ii) The employer allows each employee to apply the minimum amount 
of employer contribution determined necessary to meet the uniform 
percentage requirement under paragraph (b) of this section either 
toward the reference QHP or toward the cost of coverage under any of 
the other available QHPs.
    (d) Special rules regarding employer compliance with applicable 
State or local law. An employer will be treated as satisfying the 
uniform percentage requirement if the failure to otherwise satisfy the 
uniform percentage requirement is attributable solely to additional 
employer contributions made to certain employees to comply with an 
applicable State or local law.
    (e) Examples. The following examples illustrate the provisions of 
paragraphs (a) through (d) of this section:

    Example 1. (i) Facts. An eligible small employer (Employer) 
offers a QHP on a SHOP Exchange, Plan A, which uses composite 
billing. The premiums for Plan A are $5,000 per year for self-only 
coverage, and $10,000 for family coverage. Employees can elect self-
only or family coverage under Plan A. Employer pays $3,000 (60% of 
the premium) toward self-only coverage under Plan A and $6,000 (60% 
of the premium) toward family coverage under Plan A.
    (ii) Conclusion. Employer's contributions of 60% of the premium 
for each tier of coverage satisfy the uniform percentage 
requirement.
    Example 2. (i) Facts. Same facts as Example 1, except that 
Employer pays $3,000 (60% of the premium) for each employee electing 
self-only coverage under Plan A and pays $3,000 (30% of the premium) 
for each employee electing family coverage under Plan A.
    (ii) Conclusion. Employer's contributions of 60% of the premium 
toward self-only coverage and the same dollar amount toward the 
premium for family coverage satisfy the uniform percentage 
requirement, even though the percentage is not the same.
    Example 3. (i) Facts. Employer offers two QHPs, Plan A and Plan 
B, both of which use composite billing. The premiums for Plan A are 
$5,000 per year for self-only coverage and $10,000 for family 
coverage. The premiums for Plan B are $7,000 per year for self-only 
coverage and $13,000 for family coverage. Employees can elect self-
only or family coverage under either Plan A or Plan B. Employer pays 
$3,000 (60% of the premium) for each employee electing self-only 
coverage under Plan A, $3,000 (30% of the premium) for each employee 
electing family coverage under Plan A, $3,500 (50% of the premium) 
for each employee electing self-only coverage under Plan B, and 
$3,500 (27% of the premium) for each employee electing family 
coverage under Plan B.
    (ii) Conclusion. Employer's contributions of 60% (or $3,000) of 
the premiums for self-only coverage and the same dollar amounts 
toward the premium for family coverage under Plan A, and of 50% (or 
$3,500) of the premium for self-only of coverage and the same dollar 
amount toward the premium for family coverage under Plan B, satisfy 
the uniform percentage requirement on a QHP-by-QHP basis; therefore 
the employer's contributions to both plans satisfy the uniform 
percentage requirement.
    Example 4. (i) Facts. Same facts as Example 3, except that 
Employer designates Plan A as the reference QHP. Employer pays 
$2,500 (50% of the premium) for each employee electing self-only 
coverage under Plan A and pays $2,500 of the premium for each 
employee electing family coverage under Plan A or either self-only 
or family coverage under Plan B.
    (ii) Conclusion. Employer's contribution of 50% (or $2,500) 
toward the premium of each employee enrolled under Plan A or Plan B 
satisfies the uniform percentage requirement.
    Example 5.  (i) Facts. Employer receives a list billing premium 
quote with respect to Plan X, a QHP offered by Employer on a SHOP 
Exchange for health insurance coverage for each of Employer's four 
employees. For Employee L, age 20, the self-only premium is $3,000 
per year, and the family premium is $8,000. For Employees M, N and 
O, each age 40, the self-only premium is $5,000 per year and the 
family premium is $10,000. The total self-only premium for the four 
employees is $18,000 ($3,000 + (3 x 5,000)). Employer calculates an 
employer-computed composite self-only rate of $4,500 ($18,000/4). 
Employer offers to make contributions such that each employee would 
need to pay $2,000 of the premium for self-only coverage. Under this 
arrangement, Employer would contribute $1,000 toward self-only 
coverage for L and $3,000 toward self-only coverage for M, N, and O. 
In the event an employee elects family coverage, Employer would make 
the same contribution ($1,000 for L or $3,000 for M, N, or O) toward 
the family premium.
    (ii) Conclusion. Employer satisfies the uniform percentage 
requirement because it offers and makes contributions based on an 
employer-calculated composite self-only rate such that, to receive 
self-only coverage, each employee must pay a uniform amount which is 
not more than 50% of the composite rate, and it allows employees to 
use the same employer contributions toward family coverage.
    Example 6. (i) Facts. Same facts as Example 5, except that 
Employer calculates an employer-computed composite family rate of 
$9,500 (($8,000 + 3 x 10,000)/4) and requires each employee to pay 
$4,000 of the premium for family coverage.
    (ii) Conclusion. Employer satisfies the uniform percentage 
requirement because it offers and makes contributions based on a 
calculated self-only and family rate such that, to receive either 
self-only or family coverage, each employee must pay a uniform 
amount which is not more than 50% of the composite rate for coverage 
of that tier.
    Example 7. (i) Facts. Same facts as Example 5, except that 
Employer also receives a list billing premium quote from Plan Y with 
respect to a second QHP offered by Employer on a SHOP Exchange for 
each of Employer's 4 employees. Plan Y's quote for Employee L, age 
20, is $4,000 per year for self-only coverage or $12,000 per year 
for family coverage. For Employees M, N and O, each age 40, the 
premium is $7,000 per year for self-only coverage or $15,000 per 
year for family coverage. The total self-only premium under Plan Y 
is $25,000 ($4,000 + (3 x 7,000)). The employer-computed composite 
self-only rate is $6,250 ($25,000/4). Employer designates Plan X as 
the reference plan. Employer offers to make contributions based

[[Page 52733]]

on the employer-calculated composite premium for the reference QHP 
(Plan X) such that each employee has to contribute $2,000 to receive 
self-only coverage through Plan X. Under this arrangement, Employer 
would contribute $1,000 toward self-only coverage for L and $3,000 
toward self-only coverage for M, N, and O. In the event an employee 
elects family coverage through Plan X or either self-only or family 
coverage through Plan Y, Employer would make the same contributions 
($1,000 for L or $3,000 for M, N, or O) toward that coverage.
    (ii) Conclusion. Employer satisfies the uniform percentage 
requirement because it offers and makes contributions based on the 
employer-calculated composite self-only premium for the Plan X 
reference QHP such that, in order to receive self-only coverage, 
each employee must pay a uniform amount which is not more than 50% 
of the self-only composite premium of the reference QHP; it allows 
employees to use the same employer contributions toward family 
coverage in the reference QHP or coverage through another QHPs.
    Example 8. (i) Facts. Employer has five employees. Employer is 
located in a State that requires employers to pay 50% of employees' 
premium costs, but also requires that an employee's contribution not 
exceed a certain percentage of the employee's monthly gross earnings 
from that employer. Employer offers to pay 50% of the premium costs 
for all its employees, and to comply with the State law, Employer 
contributes more than 50% of the premium costs for two of its 
employees.
    (ii) Conclusion. Employer satisfies the uniform percentage 
requirement because its failure to otherwise satisfy the uniform 
percentage requirement is attributable solely to compliance with the 
applicable State or local law.

    (f) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  1.45R-5  Claiming the credit.

    (a) Claiming the credit. The credit is a general business credit 
and is claimed on an eligible small employer's annual income tax return 
and offsets an employer's actual tax liability for the year. The credit 
is claimed by attaching Form 8941, ``Credit for Small Employer Health 
Insurance Premiums,'' to the eligible small employer's income tax 
return or, in the case of a tax-exempt eligible small employer, by 
attaching Form 8941 to the employer's Form 990-T, ``Exempt Organization 
Business Income Tax Return.'' To claim the credit, a tax-exempt 
eligible small employer must file a form 990-T with an attached Form 
8941, even if a Form 990-T would not otherwise be required to be filed.
    (b) Estimated tax payments and alternative minimum tax (AMT) 
liability. An eligible small employer may reflect the credit in 
determining estimated tax payments for the year in which the credit 
applies in accordance with the estimated tax rules as set forth in 
section 6654 and 6655 and the applicable regulations. An eligible small 
employer may also use the credit to offset the employer's alternative 
minimum tax (AMT) liability for the year, if any, subject to certain 
limitations based on the amount of an eligible small employer's regular 
tax liability, AMT liability and other allowable credits. See section 
38(c)(1), as modified by section 38(c)(4)(B)(vi). However, an eligible 
small employer, including a tax-exempt eligible small employer, may not 
reduce its deposits and payments of employment tax (that is, income tax 
required to be withheld under section 3402, social security and 
Medicare tax under sections 3101 and 3111, and federal unemployment tax 
under section 3301) during the year in anticipation of the credit.
    (c) Reduction of section 162 deduction. No deduction under section 
162 is allowed for the eligible small employer for that portion of the 
health insurance premiums that is equal to the amount of the credit 
under Sec.  1.45R-2.
    (d) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.

Heather C. Maloy,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2013-20769 Filed 8-23-13; 8:45 am]
BILLING CODE 4830-01-P