IRS Relief Allows Certain Small Employers To Claim Section 45R Health Care Credit

Posted by Kim Chen on May 15th, 2018

Notice 2018-27, 2018-20 IRB; IR 2018-108, 4/27/2018
In a Notice and accompanying News Release, IRS has provided relief for small employers that properly claimed a credit under Code Sec. 45R for all or part of the 2016 tax year, or that properly claimed the credit for all or part of a later tax year, but are unable to offer employees a qualified health plan (QHP) through a Small Business Health Options Program (SHOP) Exchange for all or part of the remainder of the credit period (as defined in Code Sec. 45R(e)(2)) because the employer’s principal business address is in a county in which no QHP through a SHOP Exchange is available. Such employers may calculate the credit for such subsequent portion of the credit period by treating health insurance coverage provided for that portion of the credit period as qualifying for the credit if that coverage would have qualified for the credit under the pre-2014 Code Sec. 45R rules.
IRS noted that it has previously issued guidance providing transition relief under Code Sec. 45R for certain small employers with a principal business address in a county in which no QHPs were offered through a SHOP Exchange for 2014, 2015, and 2016 (Notice 2014-6, 2014-2 I.R.B. 279; Notice 2015-08, 2015-1 I.R.B. 589; and Notice 2016-75, 2016-51 I.R.B. 832), and that nothing in Notice 2018-27 is intended to modify or otherwise affect that relief.
Background. Under Code Sec. 45R which was added by the Patient Protection and Affordable Care Act (ACA, P.L. 111-148), effective for tax years beginning after Dec. 31, 2009, a tax credit is offered to certain small employers that provide health insurance to their employees (“eligible small employers”, or ESEs).
For tax years beginning after Dec. 31, 2013, the credit is available only with respect to premiums paid by a small employer for a QHP offered by the employer to its employees through a SHOP Exchange, and is available only for a 2-consecutive-tax-year period. Additionally, for tax years beginning after Dec. 31, 2013, the maximum credit rate is increased to 50% from 35% for ESEs (and to 35% from 25% for tax-exempt ESEs). (Code Sec. 45R(b))
Issue. IRS have been advised by the Department of Health and Human Services (HHS) that for calendar years 2014, 2015, and 2016, in certain counties, SHOP Exchanges would not have QHPs available for employers to offer to employees.
Under HHS regs governing eligibility for SHOP Exchanges, an employer may either
1. Offer coverage to all of its eligible employees through the SHOP whose service area includes the employer’s principal business address, or
2. Offer coverage to each eligible employee through the SHOP whose service area includes that employee’s primary worksite.
Under either approach, an employer may offer SHOP coverage to employees whose primary worksite is at its principal business address only if that address is located within the service area of the SHOP. As a result, absent IRS relief, an otherwise qualifying ESE with its principal business address in a county without any QHPs available would be denied the opportunity to claim the Code Sec. 45R credit.
To permit otherwise ESEs with principal business addresses in counties in which no QHP was available through a SHOP Exchange for 2014, 2015, and 2016 to claim the credit, IRS provided relief under which those employers were permitted to calculate the credit by treating health insurance coverage provided for the plan year beginning in 2014, 2015, or 2016, as applicable, as qualifying for the credit, provided that the coverage would have qualified for the credit under the rules applicable before Jan. 1, 2014.
HHS has advised IRS that, for calendar years 2017 and 2018, SHOP Exchanges in an increasing number of counties across the U.S. do not have any QHPs available for otherwise qualifying ESEs to offer to employees. However, given the number of years for which small employers may already have been eligible for the credit and the period of time since the enactment of Code Sec. 45R, IRS has determined that a more limited type of relief (see below) is appropriate for otherwise qualifying ESEs in counties with no SHOP Exchange coverage available after 2016.
Relief for 2017 and later years. Notice 2018-27 provides relief for an ESE that properly claimed or claims the credit for all or part of a tax year beginning after Dec. 31, 2015, but that for all or part of the remainder of the credit period has a principal business address in a county in which a QHP through a SHOP Exchange is not available.
To properly claim the credit, the employer must offer coverage through a SHOP Exchange or coverage meeting the requirements for relief under Notice 2016-75 (see “Relief provided for certain WI…”), if applicable, and must comply with all other applicable guidance. Except as provided below, such an employer may calculate the credit for the remainder of the credit period by treating health insurance coverage provided for the plan year(s) in which a QHP is not available through a SHOP Exchange as qualifying for the credit, provided that the coverage would have qualified for the credit under the Code Sec. 45R rules applicable before Jan. 1, 2014.
This relief does not alter the credit period under Code Sec. 45R; that is, even if a plan year to which the relief applies extends into a third tax year, the employer may not claim the credit for a third tax year.
To see whether a particular county had coverage available through a SHOP Exchange for 2017, see
irs.gov/newsroom/small-business-health-care-tax-credit-questions-and-answers-who-gets-the-tax-credit
To see whether a particular county has coverage available through a SHOP Exchange for 2018 and beyond, employers may refer to the See Plans and Prices Tool on healthcare.gov/small-business, accessed by selecting “Get Coverage” and then “See Plans and Prices”. Employers in states operating a State-based SHOP may visit their State-based SHOP’s website directly, or use the See Plans and Prices Tool on healthcare.gov/small-business to be redirected to their State-based SHOP to see whether a particular county has coverage available for 2018 and beyond. (Notice 2018-27, Section III)
Affordable Care Act (ACA) Section 1332 waivers. Section 1332 of the ACA permits a state to waive certain ACA provisions, including the requirement to operate a SHOP Exchange, as part of an application for a “State Innovation Waiver” to pursue innovative strategies for providing their residents with access to high quality, affordable health insurance while retaining the basic protections of the ACA. To fund their reforms, states may receive the aggregate amount of subsidies, including the credit, that would have otherwise gone to the state’s residents.
On Dec. 30, 2016, Hawaii’s application for a 5-year State Innovation Waiver was approved. As a result, Hawaii is not required to operate a SHOP Exchange for 2017-2021 and employers in Hawaii may not claim the credit for plan years beginning during this 5-year period. (Notice 2018-27, Section IV)
Effective date. Notice 2018-27 is effective as of Apr. 27, 2018, and applies to periods after Dec. 31, 2016. (Notice 2018-27, Section V)

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