Tax Credit for Employee Health Insurance Expenses of Small Employers, 36640-36654 [2014-15262]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 79, Number 125 (Monday, June 30, 2014)]
[Rules and Regulations]
[Pages 36640-36654]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15262]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9672]
RIN 1545-BL55


Tax Credit for Employee Health Insurance Expenses of Small 
Employers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations on the tax credit 
available to certain small employers that offer health insurance 
coverage to their employees. The credit is provided under section 45R 
of the Internal Revenue Code (Code), enacted by the Patient Protection 
and Affordable Care Act. These regulations affect small employers, both 
taxable and tax-exempt that are or might be eligible for the tax 
credit.

DATES: Effective date: These regulations are effective on June 30, 
2014.
    Applicability dates: For dates of applicability, see Sec.  1.45R-
5(d).

FOR FURTHER INFORMATION CONTACT: Stephanie Caden, (202) 317-6846 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 45R of the Code offers a tax credit to certain 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 
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'').
    Section 45R(a) provides a health insurance credit that is available 
to certain eligible small employers 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 (a dollar amount which is adjusted for inflation for taxable 
years beginning after December 31, 2013, and is $25,400 for taxable 
years beginning in 2014).
    Section 45R(d)(4) provides 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 final regulations, a contribution arrangement that 
meets these requirements is referred to as a ``qualifying 
arrangement.''
    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 for which a 
contribution would be taken into account under clause (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 (a dollar amount which is adjusted for 
inflation for taxable years beginning after December 31, 2013, and is 
$25,400 for taxable years beginning in 2014). 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 that 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 that 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

[[Page 36641]]

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 maximum 
amount of the credit for those years 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 for years beginning prior to 2014 solely 
because it arranges for the offering of insurance outside of a SHOP 
Exchange.
    In 2010, the Treasury Department and the IRS published two notices 
addressing the application of section 45R that taxpayers may rely upon 
for taxable years beginning before 2014: (1) Notice 2010-44 (2010-22 
IRB 717 (June 1, 2010)) (addressing the eligibility requirements and 
how to calculate and claim the credit, and providing transition relief 
for taxable years beginning in 2010 with respect to qualifying 
arrangements); and Notice 2010-82 (2010-51 IRB 857 (December 20, 2010)) 
(expanding guidance on the eligibility requirements, the uniform 
percentage requirement, and the application of the average premium 
cap).
    On August 26, 2013, the Treasury Department and the IRS released a 
notice of proposed rulemaking (REG-113792-13, 78 FR 52719) to provide 
guidance on the application of section 45R for years beginning on or 
after January 1, 2014. The section of the preamble to these proposed 
regulations entitled ``Proposed Effective/Applicability Dates'' 
provided that employers may rely on the proposed regulations for 
guidance for taxable years beginning after 2013 and before 2015. 
Fourteen comments responded to the notice of proposed rulemaking; no 
public hearing was requested or held. After consideration of all of the 
comments, these final regulations adopt the provisions of the proposed 
regulations with certain modifications, the most significant of which 
are highlighted in the Explanation and Summary of Comments below. All 
comments are available for public inspection at www.regulations.gov or 
upon request.
    The Treasury Department and the IRS issued Notice 2014-6 (2014-2 
IRB 279 (January 6, 2014)), which provides transition relief for 
certain small employers that cannot offer a QHP through a SHOP Exchange 
because the employer's principal business address is in a particular 
listed county in which a QHP will not be available through a SHOP 
Exchange for the 2014 calendar year.

Explanation and Summary of Comments

I. In General

    The proposed regulations and these final 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 beginning before 2014 and those applicable to years 
beginning after 2013. As in Notice 2010-44 and Notice 2010-82, the 
proposed and final 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) also requires that, for taxable years beginning in 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 (subject to certain transition guidance for 2014). The 
final regulations generally retain these provisions and definitions. 
The final regulations also add definitions for the term ``tobacco 
surcharge,'' which refers to the surcharge in addition to the premium 
that may be charged in the SHOP Exchange that is attributable to 
tobacco use, and for the term ``wellness program,'' which refers to a 
program under which discounts or rebates are offered for employee 
participation in programs promoting health. These definitions 
incorporate terms found in 45 CFR 147.102(a) of the final regulations 
for Health Insurance Market Rules, issued on February 27, 2013 (78 FR 
13406), and Sec.  54.9802-1(f) of the final regulations on Incentives 
for Nondiscriminatory Wellness Programs in Group Health Plans, issued 
on June 3, 2013 (78 FR 33157).

II. Eligibility for the Credit

    Consistent with section 45R and the proposed regulations, these 
final regulations define an eligible small employer as an employer that 
has no more than 25 FTEs for the taxable year, whose employees have 
average annual wages of no more than $50,000 per FTE (as adjusted for 
inflation for years after 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.\1\ These regulations 
define a tax-exempt eligible small employer as an eligible small 
employer that is described in section 501(c) and that is exempt from 
tax under section 501(a). These regulations also 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.
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    \1\ Although the term, ``eligible small employer'' is defined in 
section 45R(d)(1) to include employers with ``no more than 25 
FTEs,'' the phase out of the credit amount under section 45R(c) 
operates in such a way that an employer with exactly 25 FTEs is not 
in fact eligible for the credit.
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    Consistent with the proposed regulations, these final regulations 
further provide that employees (determined under the common law 
standard) who perform services for the employer during the taxable year 
generally are taken into account in determining FTEs and average annual 
wages. In determining FTEs, these regulations provide that FTEs are 
calculated by computing the total hours of service for the taxable year 
(using one of three allowable methods) and dividing by 2,080. If the 
result is not a whole number, the result is rounded down to the next 
lowest whole number, except if the result is less than one the employer 
rounds up to one FTE. One commenter requested that the FTE calculation 
include only full-time employees who work 40 hours a week and not part-
time employees. The final regulations do not adopt this suggestion 
because it is inconsistent with the statutory definition of full-time 
equivalent employee set forth in section 45R(d)(2). These final 
regulations provide that leased employees, as defined in section 
414(n)(2), are counted in computing a service recipient's FTEs and 
average annual wages. See section 45R(e)(1)(B). These regulations also 
provide that premiums paid on behalf of a former employee may be 
treated as paid on behalf of an employee for purposes of calculating 
the credit provided that if so treated, the former employee is also 
treated as an employee for purposes of the uniform percentage 
requirement. See Sec.  1.45R-1(a)(5)(vii).
    Consistent with the proposed regulations, these final regulations 
provide that an employee's hours of service for a year include hours 
for which the employee is paid, or entitled

[[Page 36642]]

to payment, for the performance of duties for the employer during the 
employer's taxable year and provide three methods for calculating the 
total number of hours of service for employees for the taxable year. 
One commenter requested that employees of educational organizations be 
credited with hours of service during employment breaks because the use 
of a 12-month measurement period for employees who provide services 
only during the active portions of the academic year could 
inappropriately result in these employees not being treated as full-
time employees. The final regulations do not adopt this suggestion 
because it is inconsistent with the statutory framework of section 45R, 
which bases calculations on FTEs, not full-time employees.
    Wages, for purposes of the credit, are defined in these final 
regulations (and the proposed regulations) as amounts treated as wages 
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 determine 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. One 
commenter requested that the final regulations clarify whether bonuses 
are included in the average annual wage calculation. The proposed and 
these final regulations provide that the average annual wage limitation 
is determined using the definition of wages found in section 3121(a), 
determined without regard to the social security wage base limitation 
under section 3121(a)(1); therefore, bonuses would be included to the 
extent treated as wages under section 3121(a) for purposes of FICA.
    Based on section 45R(d)(5), the proposed regulations and these 
final regulations provide that employees who work on a seasonal basis 
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. One commenter requested clarification of whether 
all employees who terminate employment before working 120 days are 
considered seasonal employees for purposes of the FTE calculation. The 
final regulations, like the proposed regulations, provide that only 
workers who perform labor or services on a seasonal basis, including 
retail workers employed exclusively during holiday seasons, meet the 
definition of a seasonal worker for purposes of the credit. The final 
regulations further provide that employers may apply a reasonable, good 
faith interpretation of the term seasonal worker and a reasonable good 
faith interpretation of 29 CFR 500.20(s)(1) (including as applied by 
analogy to workers and employment positions not otherwise covered under 
29 CFR 500.20(s)(1)).

III. Calculating the Credit

    Under section 45R and these final regulations, for taxable years 
beginning in 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.
    As provided in the proposed regulations, for purposes of 
calculating the credit under section 45R for taxable years beginning 
after 2013, the final regulations provide that an 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 employee coverage ($3,500), but 
the average premium for employee 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).
    Under section 45R and the 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 2013). For an employer with 
both more than 10 FTEs and average annual FTE wages exceeding $25,000, 
the credit is reduced based on the sum of the two reductions. This may 
reduce the credit to zero even 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). These final regulations 
incorporate these statutory phase-out provisions, and also retain the 
provisions pertaining to state subsidies and tax credit limitations.
    With respect to the payroll tax limitation for tax-exempt 
employers, section 45R and the proposed regulations defined the term 
``payroll taxes'' as (1) amounts required to be withheld under section 
3402 \2\ 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. The final regulations retain these provisions.
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    \2\ 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 and these final regulations.
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    Consistent with the proposed regulations, these final 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 eligible to claim the credit for only part of the first 
year, the filing of Form 8941 begins the first year of the two-
consecutive-taxable year credit period, regardless of when the employer 
begins offering QHPs through a SHOP. A commenter noted that the two-
year limit on the credit period might cause some employers to 
discontinue contributing to coverage once the credit expires after two 
years. However, the statutory language imposes the limitation and the 
final regulations incorporate these provisions of the proposed 
regulations pertaining to the two-consecutive-taxable year credit 
period limitation.
    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. A stand-alone dental health plan offered 
through a SHOP Exchange will be considered a QHP for purposes of the 
credit. See Patient Protection and Affordable Care Act; Establishment 
of Exchanges and Qualified Health Plans; Exchange Standards for 
Employers, 77 FR 18310, 18315 (March 27, 2012).
    Consistent with the proposed regulations, these final regulations 
provide that amounts made available by an employer under, or 
contributed by an employer to, Health Reimbursement

[[Page 36643]]

Arrangements (HRAs), health flexible spending arrangements (FSAs), and 
health savings accounts (HSAs) are not taken into account for purposes 
of determining premium payments by the employer when calculating the 
credit. One commenter requested that household employers be allowed to 
claim the credit through use of an HRA. The final regulations do not 
adopt this modification. An employer's premium payments are not taken 
into account for purposes of the section 45R credit unless they are 
paid for health insurance coverage under a qualifying arrangement, 
which is an arrangement under which the 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. For taxable years beginning in or 
after 2014, generally an employer must make premium payments on behalf 
of its employees for QHPs offered by the employer to its employees 
through a SHOP. Because an HRA is a self-insured plan, this type of 
arrangement is not health insurance coverage for purposes of the credit 
and employer contributions to this type of arrangement are not taken 
into account for purposes of the credit for any year.
    Also, consistent with the proposed regulations, the final 
regulations provide that a minister who is a common law employee is 
taken into account in an employer's FTE calculation and the premiums 
paid by the employer for health insurance for the minister may be 
counted in calculating the credit.
    With respect to 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 regulations do not adopt a rule similar to section 52(c) 
but do 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 these entities.
    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. The proposed regulations provided a transition rule that applies 
if (1) as of August 26, 2013, an eligible 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. Under the transition rule, the small 
employer 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. One commenter 
requested that this transition rule apply to all employers that have 
plan years that do not match their taxable years, including those that 
changed plan years after August 26, 2013, and that it should not be 
limited to those employers having a plan year that does not match the 
taxable year as of August 26, 2013. However, the intent of the rule was 
to provide relief for employers that had plan years that did not match 
their taxable years when the proposed regulations were issued and not 
to provide a mechanism to change plan years to maximize the credit 
without satisfying the statutory requirements. Accordingly, the final 
regulations include without change the transition rule set forth in the 
proposed regulations.
    Several commenters requested the credit be made available to 
eligible small employers if a SHOP Exchange is not available in the 
employer's principal place of business for the 2014 calendar year. 
Treasury and the IRS issued Notice 2014-6 to address these concerns 
with respect to eligible small employers with a principal business 
address in counties (listed in the Notice) in which no qualified health 
plans are available through a SHOP Exchange for 2014.\3\ For purposes 
of the transition rule provided in the final regulations for an 
eligible small employer with a group health plan year that begins on a 
date in 2014 other than the first day of the employer's taxable year, 
an employer with a principal business address in one of the counties 
listed in Notice 2014-6 is not required to begin offering coverage 
through a SHOP Exchange as of the first day of its plan year that 
begins in 2014 in order to be treated as offering coverage through a 
SHOP Exchange for its entire 2014 year. Instead, such an employer is 
required to continue offering health insurance coverage for the plan 
year that begins in 2014 that would have qualified for a tax credit 
under section 45R under the rules applicable before 2014.
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    \3\ The counties listed in Notice 2014-6 are: Washington--Adams, 
Asotin, Benton, Chelan, Clallam, Columbia, Douglas, Ferry, Franklin, 
Garfield, Grant, Grays Harbor, Island, Jefferson, King, Kitsap, 
Kittitas, Klickitat, Lewis, Lincoln, Mason, Okanogan, Pacific, Pend 
Oreille, Pierce, San Juan, Skagit, Skamania, Snohomish, Spokane, 
Stevens, Thurston, Wahkiakum, Walla Walla, Whatcom, Whitman, and 
Yakima counties; and Wisconsin--Green Lake, Lafayette, Marquette, 
Florence, and Menominee counties.
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    In accordance with Notice 2014-6, small employers described in the 
preceding paragraph may calculate the credit by treating health 
insurance coverage provided for the 2014 health plan year as qualifying 
for the section 45R credit, provided that the coverage would have 
qualified for a credit under section 45R under the rules applicable 
before 2014. This treatment applies with respect to the health plan 
year beginning in 2014, including any portion of that plan year that 
continues into 2015. If the eligible small employer claims the section 
45R credit for the 2014 taxable year, 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 first year of the two-consecutive-taxable-year credit 
period. In addition, if the eligible small employer claims the section 
45R credit for the portion of the 2014 health plan year that continues 
into 2015, the tax credit will be calculated at the 50 percent rate (35 
percent rate for tax-exempt eligible small employers) for the 
corresponding portion of the 2015 taxable year.

III. Application of Uniform Percentage Requirement

A. Uniform Premium

    Section 45R requires that to be eligible for the credit, a 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. The proposed regulations set 
forth requirements for applying this requirement in 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 employee-only coverage, or

[[Page 36644]]

other tiers of coverage, such as family coverage, and (3) whether the 
employer offers one QHP or more than one QHP. The final regulations 
incorporate the uniform percentage requirement provisions from the 
proposed regulations, but also contain additional rules for how to 
apply the uniform percentage requirement if SHOP dependent coverage is 
offered (for a definition and discussion of SHOP dependent coverage, 
see section III.C of this preamble). The uniform percentage rule 
applies only to the employees who are offered coverage and does not 
require any particular employee or class of employees to be offered 
coverage.

B. Composite Billing and List Billing

    The final regulations adopt the definitions of ``composite 
billing'' and ``list billing'' as used in the prior notices and the 
proposed regulations. 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 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 employee-only coverage, the proposed regulations 
provided that the uniform percentage requirement is met if the 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 employee-only coverage. If an employer is offering one QHP under a 
composite billing system with different tiers of coverage (for example, 
employee-only or 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 a particular 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 a tier of coverage 
other than employee-only coverage that is the same for all employees 
and is no less than the amount that the employer would have contributed 
toward employee-only coverage for that employee (and is equal to at 
least 50 percent of the premium for employee-only coverage). The final 
regulations generally retain these provisions.
    For an employer offering one QHP under a list billing system that 
offers only employee-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 employee-only 
premium that is no more than 50 percent of the employer-computed 
composite rate for employee-only coverage. The final regulations 
incorporate the definition of ``employer-computed composite rate'' from 
the proposed regulations 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 an employer offering one QHP under a list billing system with 
at least one tier of coverage with a higher premium than employee-only 
coverage, the employer satisfies the requirement if it either (1) pays 
an amount for each employee covered under each tier of coverage equal 
to or exceeding the amount that the employer would have contributed for 
that employee for employee-only coverage, calculated either based upon 
the actual premium that the insurer would have charged for that 
employee-only coverage or the employer-computed composite rate for 
employee-only coverage; or (2) meets the requirements applicable to 
employers offering one QHP with only employee-only coverage and using 
list billing described in (1) but substituting the employer-computed 
composite rate for each tier of coverage for the employer-computed 
composite rate for employee-only coverage.
    In addition to incorporating the rules stated in the proposed 
regulations, the final regulations clarify the rules for satisfying the 
uniform percentage requirement in circumstances in which employers 
elect to offer SHOP dependent coverage to employees through the SHOP 
Exchange. SHOP dependent coverage is coverage offered separately to any 
individual who is or may become eligible for coverage under the terms 
of a group health plan offered through SHOP because of a relationship 
to a participant-employee (including an employee's domestic partner or 
similar relation, such as a person with whom the employee has entered 
into a civil union), whether or not a dependent of the participant-
employee under section 152 of the Code. SHOP dependent coverage is 
different than family coverage in that it provides coverage only to the 
employee's dependents based on allowable rating factors, and does not 
include the participant-employee. As coverage purchased that does not 
include the employee, SHOP dependent coverage is not taken into account 
for purposes of applying the uniformity requirement. Accordingly, 
regardless of whether composite or list billing is used, if an employer 
opts to provide SHOP dependent coverage to employees in addition to 
employee-only coverage, the final regulations provide that the employer 
does not fail to satisfy the uniform percentage requirement by 
contributing a different amount toward that SHOP dependent coverage 
than to either employee-only coverage or family coverage, even if that 
contribution is zero, or that contribution is different for dependents 
of different employees or groups of employees.\4\ However, premiums 
paid for SHOP dependent coverage may be counted in determining the 
amount of the credit.
---------------------------------------------------------------------------

    \4\ Section 2716 of the Public Health Service Act, which is 
incorporated into the Code by section 9815 of the Code, applies 
nondiscrimination rules similar to section 105(h) to insured group 
health plans. Treasury and the IRS continue to develop the 
nondiscrimination rules under section 2716, and compliance with 
section 2716 will not be required until after regulations or other 
administrative guidance of general applicability has been issued. 
See Notice 2011-1 (2011-2 IRB). The uniformity rules differ from the 
provisions of section 2716 so that compliance with the uniformity 
rules may not necessarily mean that the arrangement also complies 
with the requirements of section 2716.
---------------------------------------------------------------------------

    The final regulations provide examples of how the uniform 
percentage requirement is applied in these situations.

D. Employers Offering More Than One Plan

    The final regulations generally adopt the rule set forth in the 
proposed regulations that 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 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

[[Page 36645]]

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 
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 and the employer allows each employee to 
apply the 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. Tobacco Surcharges and Wellness Programs

    Tobacco usage is an allowable rating factor in the SHOP Exchange 
that may affect employee premiums. In addition, wellness programs 
resulting in a premium subsidy are becoming more common. The proposed 
regulations did not address the impact of a tobacco surcharge or 
wellness program on the uniform percentage requirement. The final 
regulations provide that a tobacco surcharge applicable to coverage 
acquired on a SHOP Exchange and amounts paid by the employer to cover 
the surcharge are not included in premiums for purposes of calculating 
the uniform percentage requirement, nor are payments of the surcharge 
treated as premium payments for purposes of the credit. The final 
regulations also provide that the uniform percentage requirement is 
applied without regard to employee payment of the tobacco surcharges in 
cases in which all or part of the employee tobacco surcharges are not 
paid by the employer.
    The final regulations also address wellness programs implemented by 
the employer that affect the required employee contribution (and 
accordingly the employer contribution). For this purpose, a wellness 
program refers to a wellness program as defined for purposes of the 
regulations under the Health Insurance Portability and Accountability 
Act. See Sec.  54.9802-1(f). Specifically the final regulations provide 
that, for purposes of meeting the uniform percentage requirement, any 
additional amount of the employer contribution attributable to an 
employee's participation in a wellness program over the employer 
contribution with respect to an employee that does not participate in 
the wellness program is not taken into account in calculating the 
uniform percentage requirement, whether the difference is due to a 
discount for participation or a surcharge for nonparticipation. The 
employer contributions for employees that do not participate in the 
wellness program must be at least 50 percent of the premium (including 
any premium surcharge for nonparticipation). However, for purposes of 
computing the credit, the employer contributions are taken into 
account, including those contributions attributable to an employee's 
participation in a wellness program.

F. Employers Complying With State Law

    The Treasury Department and the IRS understand that at least one 
State requires employers to contribute a certain percentage (for 
example, 50 percent) to an employee's premium cost, but also requires 
that the employee's contribution not exceed a certain percentage of 
monthly gross earnings; as a result, in some instances, the employer's 
required contribution for a particular employee might exceed 50 percent 
of the premium. To satisfy the uniform percentage requirement under 
section 45R, the employer generally would be required to increase the 
employer contribution to all of its employees' premiums to match the 
increase for that one employee, which may be difficult, especially if 
the percentage increase is substantial. 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.

IV. Claiming the Credit

    The proposed regulations prescribed rules for claiming the credit 
on the Form 8941, Credit for Small Employer Health Insurance Premiums, 
for reflecting the credit in estimated tax payments, and for offsetting 
an eligible small employer's AMT liability for the year. The proposed 
regulations also stated that 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). The final regulations 
retain these rules and provisions.
Effective/Applicability Dates
    Section 1421(f), as amended by Sec.  10105 of the Affordable Care 
Act, provides that section 45R applies to taxable years beginning after 
December 31, 2009; however, Notice 2014-6 provides transition relief 
for certain small employers that cannot offer a QHP through a SHOP 
Exchange for 2014.
    These final regulations are effective on June 30, 2014. These final 
regulations are applicable for taxable years beginning after 2013. 
Alternatively, employers may rely on the provisions of the proposed 
regulations for taxable years beginning after 2013, and before 2015. 
For transition rules related to certain plan years beginning in 2014, 
see Sec.  1.45R-3(i).
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 Treasury decision 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, and because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. Chapter 6) does not apply.
    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 that 
will 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 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

[[Page 36646]]

the process for claiming the credit under this regulation more than 
twice.
    Pursuant to section 7805(f) of the Code, the proposed regulations 
preceding these regulations were submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comments on its 
impact on small business. No comments were received.
Drafting Information
    The principal author of these 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 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART I--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part 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) SHOP dependent coverage.
    (18) Small Business Health Options Program (SHOP).
    (19) State.
    (20) Tax-exempt eligible small employer.
    (21) Tier.
    (22) Tobacco surcharge.
    (23) United States.
    (24) Wages.
    (25) Wellness program.
    (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.
    (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.
    (5) Employers offering SHOP dependent coverage.
    (c) Employers offering more than one QHP.
    (1) QHP-by-QHP method.
    (2) Reference QHP method.
    (d) Tobacco surcharges and wellness program discounts.
    (i) Tobacco surcharges.
    (ii) Wellness programs.
    (e) Special rules regarding employer compliance with applicable 
State and local law.
    (f) Examples.
    (g) 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. 2. 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 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

[[Page 36647]]

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, or any other member of the household of these owners and 
partners who qualifies as a dependent under section 152(d)(2)(H).
    (iv) Seasonal workers. 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) 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 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.
    (vi) Former employees. Premiums paid on behalf of a former employee 
with no hours of service may be treated as paid on behalf of an 
employee for purposes of calculating the credit (see Sec.  1.45R-3) 
provided that, if so treated, the former employee is also treated as an 
employee for purposes of the uniform percentage requirement (see Sec.  
1.45R-4). For the treatment of terminated employees for purposes of 
determining employer eligibility for the credit, see Sec.  1.45R-2(c).
    (6) Employer-computed composite rate. The term employer-computed 
composite rate refers to a rate for a tier of coverage (such as 
employee-only, dependent 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 may be used in list billing to 
convert individual premiums for a tier of coverage into an employer-
computed composite rate for that tier of coverage. See Sec.  1.45R-
4(b)(3).
    (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.  1.45R-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

[[Page 36648]]

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 or QHP. The term qualified health plan 
or the term 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. Employers may apply a reasonable, good faith 
interpretation of the term seasonal worker and a reasonable good faith 
interpretation of 29 CFR 500.20(s)(1) (including as applied by analogy 
to workers and employment positions not otherwise covered under 29 CFR 
500.20(s)(1)).
    (17) SHOP dependent coverage. The term SHOP dependent coverage 
refers to coverage offered through SHOP separately to any individual 
who is or may become eligible for coverage under the terms of a group 
health plan offered through SHOP because of a relationship to a 
participant-employee, whether or not a dependent of the participant-
employee under section 152 of the Internal Revenue Code. The term SHOP 
dependent coverage does not include coverage such as family coverage, 
which includes coverage of the participant-employee.
    (18) 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.
    (19) State. The term State means a State as defined in section 
7701(a)(10), including the District of Columbia.
    (20) 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).
    (21) 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, employee-only coverage, dependent coverage, and family 
coverage would constitute three separate tiers of coverage.
    (22) Tobacco surcharge. The term tobacco surcharge means any 
allowable differential that is charged for insurance in the SHOP 
Exchange that is attributable to tobacco use as the term tobacco use is 
defined in 45 CFR 147.102(a)(1)(iv).
    (23) United States. The term United States means United States as 
defined in section 7701(a)(9).
    (24) 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).
    (25) Wellness program. The term wellness program for purposes of 
section 45R means a program of health promotion or disease prevention 
subject to the requirements of Sec.  54.9802-1(f).
    (b) Effective/applicability date. This section is applicable for 
periods after 2013. For rules relating to certain plan years beginning 
in 2014, see Sec.  1.45R-3(i).


Sec.  1.45R-2  Eligibility for the credit.

    (a) Eligible small employer. To be eligible for the credit under 
section 45R, 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 the employer's FTEs must not exceed an amount equal to 
twice the dollar amount in effect under Sec.  1.45R-3(c)(2). For 
purposes of eligibility for the credit for taxable years beginning in 
or after 2014, a 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 if it is not 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 located outside the United States (including an 
employer located in 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 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 such 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 employees who

[[Page 36649]]

terminate 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 am to 12:00 pm 
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.
    (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 fewer than 25 employees (or FTEs) enroll for 
coverage through the SHOP Exchange.

    (g) Effective/applicability date. This section is applicable for 
periods after 2013. For transition rules relating to certain plan years 
beginning in 2014, see Sec.  1.45R-3(i).

[[Page 36650]]

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, 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 is 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 employee-only and SHOP dependent 
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). Six employees are enrolled in 
employee-only coverage and 5 of these 6 employees have also enrolled 
either one child or one spouse in SHOP dependent coverage. Employer 
pays 50% of the premiums for all employees enrolled in employee-only 
coverage and 50% of the premiums for all employees who enrolled 
family members in SHOP dependent coverage (and the employee is 
responsible for the remainder in each case). The premiums are $4,000 
a year for employee-only coverage and $3,000 a year for each 
individual enrolled in SHOP dependent coverage. The average premium 
for the small group market in Employer's rating area is $5,000 for 
employee-only coverage and $4,000 for each individual enrolled in 
SHOP dependent coverage. Employer's premium payments for each FTE 
($2,000 for employee-only coverage and $1,500 for SHOP dependent 
coverage) do not exceed 50 percent of the average premium for the 
small group market in Employer's rating area ($2,500 for employee-
only coverage and $2,000 for each individual enrolled in SHOP 
dependent coverage).
    (ii) Conclusion. The amount of premiums paid by Employer for 
purposes of computing the credit equals $19,500 ((6 x $2,000) plus 
(5 x $1,500)).
    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 employee-only coverage and $5,000 for each 
dependent enrolled in coverage. Employer's premium payments for each 
employee ($3,000 for employee-only coverage and $2,500 for SHOP 
dependent coverage) exceed 50% of the average premium for the small 
group market in Employer's rating area ($2,500 for self-only 
coverage and $2,000 for family coverage).
    (ii) Conclusion. The amount of premiums paid by Employer for 
purposes of computing the credit equals $25,000 ((6 x $2,500) plus 
(5 x $2,000)).

    (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 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)

[[Page 36651]]

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 (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 (3) of this section. For purposes of these 
examples, each employer is an eligible small employer that is not a 
tax-exempt organization and 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 employee-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. 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 
employee-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. 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 available to an eligible small employer, including a tax-
exempt eligible small employer, only 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 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 calculation and average annual FTE wage calculation unless the 
seasonal worker works for the employer on more than 120 days during the 
taxable year). Subject to the average premium limitation, premiums paid 
on behalf of an employee with respect to any individuals who are or may 
become eligible for coverage under the terms of the plan because of a 
relationship to the employee (including through family coverage or SHOP 
dependent coverage) may also be taken into account in

[[Page 36652]]

determining the amount of the credit. (However, premiums paid for SHOP 
dependent coverage are not taken into account in determining whether 
the uniform percentage requirement is met, see Sec.  1.45R-4(b)(5).)
    (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 benefits 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 for a health plan year that begins on a date other than the 
first day of its taxable year. In such a case, if the 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 on or 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 this 
paragraph (i) of this section. For purposes of this example, it is 
assumed that the eligible small employer is not a tax-exempt 
organization and that 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. As of August 26, 2013, Employer had 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 also provides other coverage from January 1, 
2014 through June 30, 2014 that would have qualified for a credit 
under section 45R based on the rules applicable to taxable years 
beginning before 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 this paragraph (i) of this section. Accordingly, in 
calculating the credit, Employer may count premiums paid for the 
coverage from January 1, 2014 through June 30, 2014, as well as 
premiums paid for the coverage 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 2013. For transition rules relating to certain plan years 
beginning in 2014, see paragraph (i) of this section.


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, employee-only coverage, composite 
billing. For an eligible small employer offering employee-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 employee-only coverage under the QHP, and that 
amount is equal to at least 50 percent of the premium for employee-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 employee-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 employee-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, employee-only coverage, list 
billing. For an eligible small employer offering one QHP providing only 
employee-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 employee-
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 
employee-only premium that is no more than 50 percent of the employer-
computed composite rate for employee-only coverage.
    (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 employee-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 
employee-only coverage, calculated either based upon the actual premium 
that would have been charged by the insurer for that employee for 
employee-only coverage or based upon the employer-computed composite 
rate for employee-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

[[Page 36653]]

for each tier of coverage for the employer-computed composite rate for 
employee-only coverage.
    (5) Employers offering SHOP dependent coverage. If SHOP dependent 
coverage is offered through the SHOP Exchange, the employer does not 
fail to satisfy the uniform percentage requirement by contributing a 
different amount toward that SHOP dependent coverage, even if that 
contribution is zero. For treatment of premiums paid on behalf of an 
employee's dependents, see Sec.  1.45R-3(g)(1).
    (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, and
    (ii) The employer allows each employee to apply an 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) Tobacco surcharges and wellness program discounts or rebates--
(i) Tobacco surcharges. The tobacco surcharge and amounts paid by the 
employer to cover the surcharge are not included in premiums for 
purposes of calculating the uniform percentage requirement, nor are 
payments of the surcharge treated as premium payments for purposes of 
calculating the credit. The uniform percentage requirement is also 
applied without regard to employee payment of the tobacco surcharges in 
cases in which all or part of the employee tobacco surcharges are not 
paid by the employer.
    (ii) Wellness programs. If a plan of an employer provides a 
wellness program, for purposes of meeting the uniform percentage 
requirement any additional amount of the employer contribution 
attributable to an employee's participation in the wellness program 
over the employer contribution with respect to an employee that does 
not participate in the wellness program is not taken into account in 
calculating the uniform percentage requirement, whether the difference 
is due to a discount for participation or a surcharge for 
nonparticipation. The employer contribution for employees that do not 
participate in the wellness program must be at least 50 percent of the 
premium (including any premium surcharge for nonparticipation). 
However, for purposes of computing the credit, the employer 
contributions are taken into account, including those contributions 
attributable to an employee's participation in a wellness program.
    (e) 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.
    (f) Examples. The following examples illustrate the provisions of 
paragraphs (a) through (e) 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 employee-
only coverage, and $10,000 for family coverage. Employees can elect 
employee-only or family coverage under Plan A. Employer pays $3,000 
(60% of the premium) toward employee-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 
employee-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 employee-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 employee-only coverage and $10,000 for family 
coverage. The premiums for Plan B are $7,000 per year for employee-
only coverage and $13,000 for family coverage. Employees can elect 
employee-only or family coverage under either Plan A or Plan B. 
Employer pays $3,000 (60% of the premium) for each employee electing 
employee-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 employee-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 employee-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 employee-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 employee-only 
coverage under Plan A and pays $2,500 of the premium for each 
employee electing family coverage under Plan A or either employee-
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 employee-only premium is 
$3,000 per year, and the family premium is $8,000. For Employees M, 
N and O, each age 40, the employee-only premium is $5,000 per year 
and the family premium is $10,000. The total employee-only premium 
for the four employees is $18,000 ($3,000 + (3 x 5,000)). Employer 
calculates an employer-computed composite employee-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 employee-
only coverage. Under this arrangement, Employer would contribute 
$1,000 toward employee-only coverage for L and $3,000 toward 
employee-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 employee-only rate such that, to 
receive employee-only coverage, each employee must pay a uniform 
amount which is not more than 50% of the

[[Page 36654]]

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 employee-only and family rate such that, to receive 
either employee-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 employee-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 employee-only coverage or $15,000 per 
year for family coverage. The total employee-only premium under Plan 
Y is $25,000 ($4,000 + (3 x 7,000)). The employer-computed composite 
employee-only rate is $6,250 ($25,000/4). Employer designates Plan X 
as the reference plan. Employer offers to make contributions based 
on the employer-calculated composite premium for the reference QHP 
(Plan X) such that each employee has to contribute $2,000 to receive 
employee-only coverage through Plan X. Under this arrangement, 
Employer would contribute $1,000 toward employee-only coverage for L 
and $3,000 toward employee-only coverage for M, N, and O. In the 
event an employee elects family coverage through Plan X or either 
employee-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 employee-only premium for the Plan X 
reference QHP such that, in order to receive employee-only coverage, 
each employee must pay a uniform amount which is not more than 50% 
of the employee-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 offers employee-only and SHOP 
dependent coverage through a QHP to its three employees using list 
billing. All three employees enroll in the employee-only coverage, 
and one employee elects to enroll two dependents in SHOP dependent 
coverage. Employer contributes 100% of the employee-only premium 
costs, but only contributes 25% of the premium costs toward SHOP 
dependent coverage.
    (ii) Conclusion. Employer's contribution of 100% toward the 
premium costs of employee-only coverage satisfies the uniform 
percentage requirement, even though Employer is only contributing 
25% toward SHOP dependent coverage.
    Example 9. (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.
    Example 10. (i) Facts. Employer has three employees who all 
enroll in employee-only coverage. Employer is located in a State 
that has a tobacco surcharge on the premiums of employees who use 
tobacco. One of Employer's employees smokes. Employer contributes 
50% of the employee-only premium costs, but does not cover any of 
the tobacco surcharge for the employee who smokes.
    (ii) Conclusion. Employer's contribution of 50% toward the 
premium costs of employee-only coverage satisfies the uniform 
percentage requirement. Tobacco surcharges are not factored into 
premiums when calculating the uniform percentage requirement.
    Example 11. (i) Facts. Employer has five employees who all 
enroll in employee-only coverage. Employer offers a wellness program 
that reduces the employee share of the premium for employees who 
participate in the wellness program. Employer contributes 50% of the 
premium costs of employee-only coverage for employees who do not 
participate in the wellness program and 55% of the premium costs of 
employee-only coverage for employees who participate in the wellness 
program. Three of the five employees participate in the wellness 
program.
    (ii) Conclusion. Employer's contribution of 50% toward the 
premium costs of employee-only coverage for the two employees who do 
not participate in the wellness program and 55% toward the premium 
costs of employee-only coverage for three employees who participate 
in the wellness program satisfies the uniform percentage requirement 
because the additional 5% contribution due to the employees' 
participation in the wellness program is not taken into account. 
However, the additional 5% contributions are taken into account for 
purposes of calculating the credit.

    (g) Effective/applicability date. This section is applicable for 
periods after 2013. For transition rules relating to certain plan years 
starting in 2014, see Sec.  1.45R-3(i).


Sec.  1.45R-5  Claiming the credit.

    (a) Claiming the credit. The credit is a general business credit. 
It 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 
sections 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 the 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 2013. For rules relating to certain plan years beginning 
in 2014, see Sec.  1.45R-3(i).

John Dalrymple,
Deputy Commissioner for Services and Enforcement.

    Approved: June 24, 2014.
 Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-15262 Filed 6-26-14; 4:15 pm]
BILLING CODE 4830-01-P