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IRS tough on small-group health tax credit time

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Officials at the Internal Revenue Service (IRS) have found no flexibility in the time limits for the small-group health insurance tax credit. An employer can use the small-group tax credit provided in the Patient Protection and Affordable Care Act (PPACA) for only two consecutive taxable years, officials warned in the preamble to new final small-group tax credit regulations.

The IRS developed the regulations to implement the parts of PPACA that added Section 45R to the Internal Revenue Code (IRC).

Before the PPACA exchange Small Business Health Options Program (SHOP) came to life, IRC Section 45R let a small employer use the credit to defray the cost of any major medical coverage. Now, employers that want to get the credit must use it to pay for “qualified health plan” (QHP) coverage from a SHOP exchange.

A commenter told the IRS that letting employers use the tax credit for two years might lead some employers to drop coverage after the second year is up. ”The statutory provision imposes the limitation,” officials say in a response to the comment.

Even if a small employer uses the tax credit to pay for coverage during part of one year, then uses the tax credit for an entire second year, the two-consecutive-taxable year credit period will end after the end of the second year, officials say.

Elsewhere in the preamble, officials say:

  • Only premiums paid by the employer for employees in SHOP QHP coverage are counted when calculating the credit.
  • Amounts the employer puts in a health reimbursement arrangement (HRA), health savings account (HSA) or health flexible spending arrangement (FSA) are also left out of the credit calculations.
  • Premiums paid for a minister is a common-law employee can be included in credit calculations.