The IRS issued proposed regulations on Friday that provide guidance on the tax credit available to certain small employers that offer health insurance coverage to their employees under Code Section 45R, enacted by the Patient Protection and Affordable Care Act.

Section 45R offers a tax credit to certain small employers that provide insured health coverage to their employees. The regs define an eligible small employer as an employer with no more than 25 full-time employees for the taxable year, whose employees have average annual wages of less than $50,000 per FTE (as adjusted for inflation for years after Dec. 31, 2013), and that has a qualifying arrangement in effect that requires the employer to pay a uniform percentage (not less than 50 percent) of the premium cost of a qualified health plan offered by the employer through a Small Business Health Options Program, or SHOP, Exchange.

It isn’t necessary for employees to perform services in a trade or business. For example, a household employer that otherwise satisfies the requirements of Section 45R is an eligible small employer for purposes of the credit. An employer located outside the United States, including a U.S. territory, may also be an eligible small employer if the employer has income effectively connected with the conduct of a trade or business in the U.S, otherwise meets the requirements of section 45R and is able to offer a QHP to its employees through a SHOP Exchange.

For taxable years beginning during or after 2014, the maximum credit for eligible small employers, other than tax exempts, is 50 percent of the small employer’s premium payments made on behalf of its employees under a qualifying arrangement. For a tax-exempt eligible small employer, the maximum is 35 percent. The employer’s tax credit is subject to a number of adjustments and limitations contained in the regs.

Eligible small employers that are not tax-exempt would calculate their credit on Form 8941, Credit for Small Employer Health Insurance Premiums. The credit can be applied against both regular taxes and the Alternative Minimum Tax. For tax-exempt eligible small employers, the credit is also calculated on Form 8941, and is attached to Form 990-T, Exempt Organization Business Income Tax Return.

The regs are proposed to be effective the date they are published as final in the Federal Register, and apply to taxable years beginning after 2013. If future guidance is more restrictive, it will not be applied retroactively.

Comments or requests for a public hearing on the regs must be received by Nov. 25, 2013.

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