Td 9672

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 45R.—Employee
health insurance expenses
of small employers
26 CFR 1.45R-0 Tax credit to certain small employers that provide insured health coverage to their
employees.

TD 9672
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

Tax Credit for Employee
Health Insurance Expenses
of Small Employers
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
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 1.45R–1(b), 1.45R–2(g),
1.45R–3(j), 1.45R– 4(g) and 1.45R–5(c).
FOR FURTHER INFORMATION
CONTACT: Stephanie Caden, (202) 3176846 (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 Pro-

July 21, 2014

tection and Affordable Care Act, enacted
March 23, 2010, Public Law No. 111–148
(as amended by section 10105(e) of the
Patient Protection and Affordable Care
Act, which was amended by the Health
Care and Education Reconciliation Act of
2010, Public Law 111–152 (124 Stat.
1029)) (collectively, the “Affordable Care
Act”).
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

196

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.

Bulletin No. 2014 –30

Section 45R(e)(2) provides that for
taxable years beginning in or after 2014,
the credit period means the twoconsecutive-taxable year period beginning
with the first taxable year in which the
employer (or any predecessor) offers one
or more QHPs to its employees through a
SHOP Exchange.
For taxable years beginning in 2010,
2011, 2012, and 2013, section 45R(g) provides that the credit is determined without
regard to whether the taxable year is in a
credit period, and no credit period is
treated as beginning with a taxable year
beginning before 2014. The maximum
amount of the credit for those years is 35
percent (25 percent in the case of a taxexempt 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 regula-

tions 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 re-

tain 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 § 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.
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

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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July 21, 2014

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
§ 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 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 con-

July 21, 2014

sidering 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-

198

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

Bulletin No. 2014 –30

34022 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.
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 twoconsecutive-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 Fed. Reg.
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 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 taxexempt 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

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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July 21, 2014

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.
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 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 employeeonly 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

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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Bulletin No. 2014 –30

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 employeeonly coverage and using list billing described in (1) but substituting the
employer-computed composite rate for
each tier of coverage for the employercomputed composite rate for employeeonly 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 participantemployee. 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.
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 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 deter-

mined 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
§ 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

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.

Bulletin No. 2014 –30

201

July 21, 2014

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
§ 10105 of the Affordable Care Act, provides that section 45R applies to taxable
years beginning after December 31, 2009;
however, Notice 2014 – 6 provides transi-

July 21, 2014

tion 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 § 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 (be-

202

cause 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 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.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART I–INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.45R– 0 is added to
read as follows:
§ 1.45R– 0 Table of contents
This section lists the table of contents
for §§ 1.45R–1 through 1.45R–5.
§ 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.

Bulletin No. 2014 –30

(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.

(3) Credits may not exceed net premium payment.
(4) Examples.
(e) Payroll tax limitation for taxexempt 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.

§ 1.45R–2 Eligibility for the credit.

§ 1.45R– 4 Uniform percentage of
premium paid.

(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.
§ 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.

Bulletin No. 2014 –30

(a) In general.
(b) Employers offering one QHP.
(1) Employers offering one QHP, selfonly coverage, composite billing.
(2) Employers offering one QHP, other
tiers of coverage, composite billing.
(3) Employers offering one QHP, selfonly 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.
§ 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.

203

(d) Effective/applicability date.
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:
§ 1.45R–1 Definitions.
(a) Definitions. The definitions in this
section apply to this section and
§§ 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-consecutivetaxable-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
Form 8941 in the case of a tax-exempt
eligible employer). For a transition rule
for 2014, see § 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

July 21, 2014

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 § 1.45R–2.
(ii) For the definition of tax-exempt
eligible small employer, see paragraph
(a)(20) 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 § 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 § 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).

July 21, 2014

(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 § 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 § 1.45R– 4). For the treatment of terminated employees for purposes of determining employer eligibility
for the credit, see § 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

204

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 § 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-inlaw,
daughter-in-law,
father-in-law,
mother-in-law, brother-in-law or sister-inlaw. 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 § 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

Bulletin No. 2014 –30

employer-provided group health plan,
those payments are not taken into account
in determining the employer’s net premium payments.
(12) Nonelective contribution. The
term nonelective contribution means an
employer contribution other than a contribution pursuant to a salary reduction arrangement under section 125.
(13) Payroll taxes. For purposes of section 45R, the term payroll taxes means
amounts required to be withheld as tax
from the employees of a tax-exempt eligible small employer under section 3402,
amounts required to be withheld from
such employees under section 3101(b),
and amounts of tax imposed on the taxexempt 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

Bulletin No. 2014 –30

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 § 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 § 1.45R–3(i).

205

§ 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 § 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 § 1.45R– 4.

July 21, 2014

(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
§ 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 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

July 21, 2014

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 8:00am to 12:00pm 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

206

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

Bulletin No. 2014 –30

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
§ 1.45R–3(i).
§ 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;

Bulletin No. 2014 –30

(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 taxexempt eligible small employer described
in paragraph (e) of this section;
(5) The two-consecutive-taxable yearcredit 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 fulltime equivalent employees (FTEs) with average annual wages of $23,000 per FTE. All 9 employees are
employees as defined under § 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

207

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-ofliving 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 exam-

July 21, 2014

ples, 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) 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

July 21, 2014

these payments on behalf of the employer
for purposes of determining whether the
employer has satisfied the requirement to
pay an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of coverage. Also, except as
described below in paragraph (d)(3) of
this section, these premium payments by
the State are treated as an employer contribution under this section for purposes of
calculating the credit.
(3) Credits may not exceed net premium payment. Regardless of the application of paragraphs (d)(1) and (d)(2) of this
section, in no event may the amount of the
credit exceed the amount of the employer’s net premium payments as defined in
§ 1.45R–1(a)(11).
(4) Examples. The following examples
illustrate the provisions of paragraphs
(d)(1) through (d)(3) of this section. For
purposes of these examples, 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

208

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 taxexempt 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 § 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

Bulletin No. 2014 –30

$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 taxexempt 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
§ 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 determining the amount of the credit. (However, premiums paid for SHOP dependent
coverage are not taken into account in
determining whether the uniform percent-

Bulletin No. 2014 –30

age requirement is met, see § 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

209

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.
§ 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

July 21, 2014

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 employeeonly 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 cov-

July 21, 2014

erage 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 employercomputed composite rate for employeeonly coverage, or
(ii) Meets the requirements of paragraph (b)(3) of this section for each tier of
coverage that it offers substituting the
employer-computed composite rate for
each tier of coverage for the employercomputed composite rate for employeeonly 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 § 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 percent-

210

age 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—(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

Bulletin No. 2014 –30

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 employeeonly 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-byQHP 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

Bulletin No. 2014 –30

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
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 employercomputed 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 employeeonly 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

211

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 employeeonly 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 employeeonly 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.

July 21, 2014

(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
§ 1.45R–3(i).

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 § 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 § 1.45R–3(i).

§ 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
1

John Dalrymple
Deputy Commissioner
for Services and Enforcement.

gevity annuity contracts in tax-qualified
defined contribution plans under section
401(a) of the Internal Revenue Code
(Code), section 403(b) plans, individual
retirement annuities and accounts
(IRAs) under section 408, and eligible
governmental plans under section
457(b). These regulations will provide
the public with guidance necessary to
comply with the required minimum distribution rules under section 401(a)(9)
applicable to an IRA or a plan that holds
a longevity annuity contract. The regulations will affect individuals for whom
a longevity annuity contract is purchased under these plans and IRAs (and
their beneficiaries), sponsors and administrators of these plans, trustees and custodians of these plans and IRAs, and
insurance companies that issue longevity annuity contracts under these plans
and IRAs.

Approved June 24, 2014,

Mark J. Mazur
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on, June 26,
2014, 4:15 p.m., and published in the issue of the Federal
Register for June 30, 2014, 79 F.R. 36640)

DATES: Effective date: These regulations
are effective on July 2, 2014.
Applicability date: These regulations
apply to contracts purchased on or after
July 2, 2014.
FOR
FURTHER
INFORMATION
CONTACT: Jamie Dvoretzky at (202)
317-6799 (not a toll-free number).
SUPPLEMENTARY INFORMATION:

Section 401.—Qualified
Pension, Profit-Sharing,
and Stock Bonus Plans
26 CFR 1.401(a)(9): Required minimum distributions for defined benefit plans and annuity contracts.

TD 9673
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Longevity Annuity Contracts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations relating to the use of lon-

Paperwork Reduction Act
The collection of information contained in these regulations has been reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–2234. The collection of information in these final regulations is in
A–17(a)(6) of § 1.401(a)(9)– 6 (disclosure
that a contract is intended to be a qualifying
longevity annuity contract (QLAC), defined
in A–17 of that section) and § 1.6047–2 (an
annual statement must be provided to
QLAC owners and their surviving spouses
containing information required to be furnished to the IRS). The information in
A–17(a)(6) of § 1.401(a)(9)– 6 is required in
order to notify employees1 and beneficiaries, plan sponsors, and the IRS that the
regulations apply to a contract. The infor-

An “employee” includes the owner of an IRA, where applicable.

July 21, 2014

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Bulletin No. 2014 –30