Notice 2010-44

4. Whether the Service can administer
the recommended guidance on a uniform
basis; and
5. Whether the recommended guidance
reduces controversy and lessens the burden on taxpayers or the Service.
Taxpayers may submit recommendations for guidance at any time during the
year. Please submit recommendations by
June 11, 2010, for possible inclusion on
the original 2010–2011 Guidance Priority
List. The Treasury Department and the
Service may update the 2010–2011 Guidance Priority List periodically to reflect
additional guidance that the Treasury Department and the Service intend to publish
during the plan year. The periodic updates
allow the Treasury Department and the
Service to respond to the need for additional guidance that may arise during the
plan year. Recommendations for guidance
received after June 11, 2010, will be reviewed for inclusion in the next periodic
update.
Taxpayers are not required to submit
recommendations for guidance in any particular format. Taxpayers should, however, briefly describe the recommended
guidance and explain the need for the guidance. In addition, taxpayers may include
an analysis of how the issue should be resolved. It would be helpful if taxpayers
suggesting more than one guidance project
prioritize the projects by order of importance. If a large number of projects are being suggested, it also would be helpful if
the projects were grouped in terms of high,
medium or low priority.
Taxpayers should send written comments to:
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2010–43)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
or hand deliver comments Monday
through Friday between the hours of
8 a.m. and 4 p.m. to:

Courier’s Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2010–43)
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
Alternatively, taxpayers may submit
comments
electronically
via
e-mail to the following address:
[email protected].
Taxpayers should include “Notice
2010–43” in the subject line.
All
comments submitted by the public will
be available for public inspection and
copying in their entirety.
For further information regarding this
notice, contact Henry Schneiderman of
the Office of Associate Chief Counsel
(Procedure and Administration) at (202)
622–3400 (not a toll-free call).

Tax Credit for Employee
Health Insurance Expenses of
Small Employers
Notice 2010–44
I. PURPOSE AND BACKGROUND
Section 45R of the Internal Revenue
Code (Code) offers a tax credit to certain
small employers that provide health insurance coverage to their employees. It
is effective for taxable years beginning in
2010. Both taxable employers and employers that are organizations described in
section 501(c) that are exempt from tax
under section 501(a) (tax-exempt employers) may be eligible for the section 45R
credit. Employers that satisfy the requirements for the credit are referred to in this
notice as “eligible small employers.”
Section 45R was added to the Code
by section 1421 of the Patient Protection
and Affordable Care Act (Affordable Care
Act), enacted March 23, 2010, Pub. L. No.
111–148. This notice provides guidance
on section 45R as in effect for taxable years
beginning before January 1, 2014, and also
includes transition relief for taxable years
beginning in 2010 with respect to the requirements for a qualifying arrangement
under section 45R.

II. EMPLOYERS ELIGIBLE FOR THE
CREDIT
A. Overview of Requirements for
Eligibility
In order to be an eligible small employer, (1) the employer must have fewer
than 25 full-time equivalent employees
(FTEs) for the taxable year; (2) the average annual wages of its employees for
the year must be less than $50,000 per
FTE; and (3) the employer must maintain
a “qualifying arrangement.”1 A qualifying arrangement 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 (but see section V of
this notice for transition relief for taxable
years beginning in 2010 with respect to
the requirements for a qualifying arrangement). 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 for
purposes of section 45R unless it is an organization described in section 501(c) that
is exempt from tax under section 501(a).
The following steps must be followed to
determine whether an employer is eligible
for a credit under section 45R:
1. Determine the employees who are
taken into account for purposes of the
credit.
2. Determine the number of hours of
service performed by those employees.
3. Calculate the number of the employer’s FTEs.
4. Determine the average annual wages
paid per FTE.
5. Determine the premiums paid by the
employer that are taken into account for
purposes of the credit. Specifically, the
premiums must be paid by an employer
under a qualifying arrangement and must
be paid for health insurance that meets the
requirements of section 45R.
The remainder of this section II explains the steps involved in determining
whether an employer is eligible for the
credit. Section III of this notice explains
how to calculate the credit, and section IV

1 Although the term “eligible small employer” is defined in section 45R(d)(1) to include employers with “no more than” 25 FTEs and average annual wages that “do not exceed” $50,000, the
phaseout of the credit amount under section 45R(c) operates in such a way that an employer with exactly 25 FTEs or with average annual wages exactly equal to $50,000 is not in fact eligible
for the credit.

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2010–22 I.R.B.

explains how to claim the credit. Finally,
section V provides transition relief for taxable years beginning in 2010 with respect
to certain requirements for qualifying arrangements.
B. Determining the Employees Taken into
Account
In general, employees who perform services for the employer during the taxable
year are taken into account in determining the employer’s FTEs, average wages,
and premiums paid, with certain individuals excluded and with employees of certain
related employers included. This section
describes these rules.
Partners in a business and certain owners are not taken into account as employees
for purposes of section 45R. Specifically,
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 are not taken into account as employees for purposes of the credit. Family members of these owners and partners
are also not taken into account as employees. For purposes of section 45R, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a
step-parent; a niece or nephew; an aunt or
uncle; or a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law
or sister-in-law. Finally, any other member
of the household of these owners and partners who qualifies as a dependent under
section 152(d)(2)(H) is not taken into account as an employee for purposes of section 45R.
Accordingly, the wages and hours of
these business owners and partners, and of
their family members and dependent members of their household, are disregarded
in determining FTEs and average annual
wages, and the premiums paid on their behalf are not counted in determining the
amount of the section 45R credit.
Seasonal workers are disregarded in
determining FTEs and average annual
wages unless the seasonal worker works
for the employer on more than 120 days
during the taxable year, although premiums paid on their behalf may be counted
in determining the amount of the section
45R credit.

2010–22 I.R.B.

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. Thus, all employees of a controlled group under section
414(b) or (c), or an affiliated service group
under section 414(m) (except employees
not taken into account as described above),
and all wages paid to, and premiums paid
for, employees by the members of the controlled group or affiliated service group
(except employees not taken into account
as described above), are taken into account
in determining whether any member of the
controlled group or affiliated service group
is an eligible small employer.
C. Determining the Number of Hours of
Service Worked by Employees for the
Taxable Year
An employee’s hours of service for a
year include the following: (1) 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; and (2) 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).
In calculating the total number of hours
of service which must be taken into account for an employee for the year, the employer may use any of the following methods: (1) determine actual hours of service
from records of hours worked and hours
for which payment is made or due (payment is made or due for vacation, holiday, illness, incapacity, etc., as described
above); (2) 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 rule
(1) or (2) in the preceding paragraph; or (3)
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

718

with at least one hour of service under rule
(1) or (2) in the preceding paragraph.
Examples. In all of the examples in
this notice, none of the employees is an
owner, partner in a business or otherwise
excluded from being taken into account
under section 45R.
Example 1 — Counting hours of service by hours
actually worked or for which payment is made or due.
(i) For the 2010 taxable year, an employer’s payroll
records indicate that Employee A worked 2,000 hours
and was paid for an additional 80 hours on account of
vacation, holiday and illness. The employer counts
hours actually worked.
(ii) 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
weeks-worked equivalency. (i) For the 2010 taxable
year, Employee B worked 49 weeks, took 2 weeks of
vacation with pay, and took 1 week of leave without
pay. The employer uses the weeks-worked equivalency.
(ii) Under this method of counting hours, Employee B must be credited with 2,040 hours of service
(51 weeks multiplied by 40 hours per week).

D. Determining the Number of an
Employer’s FTEs
The number of an employer’s FTEs is
determined by dividing (1) the total hours
of service, determined in accordance with
section II.C of this notice, credited during
the year to employees taken into account
under section II.B of this notice (but not
more than 2,080 hours for any employee)
by (2) 2,080. The result, if not a whole
number, is then rounded to the next lowest
whole number. In some circumstances,
an employer with 25 or more employees
may qualify for the credit if some of its
employees work part-time. For example,
an employer with 46 half-time employees
(meaning they are paid wages for 1,040
hours) has 23 FTEs and, therefore, may
qualify for the credit.
Example 3 — Determining the number of FTEs.
(i) For the 2010 taxable year, an employer pays 5
employees wages for 2,080 hours each, 3 employees
wages for 1,040 hours each, and 1 employee wages
for 2,300 hours. The employer does not use an equivalency method to determine hours of service for any
of these employees.
(ii) The employer’s FTEs would be calculated as
follows:
(1) Total hours of service not exceeding 2,080 per
employee is the sum of:
a. 10,400 hours of service for the 5 employees
paid for 2,080 hours each (5 x 2,080)
b. 3,120 hours of service for the 3 employees paid
for 1,040 hours each (3 x 1,040), and

June 1, 2010

c. 2,080 hours of service for the 1 employee paid
for 2,300 hours (lesser of 2,300 and 2,080).
d. The sum of a, b and c equals 15,600 hours of
service.
(2) FTEs equal 7 (15,600 divided by 2,080 = 7.5,
rounded to the next lowest whole number).
Example 4 — Determining the number of FTEs:
(i) For the 2010 taxable year, an employer has 26
FTEs with average annual wages of $23,000 per FTE.
Only 20 of the employer’s employees are enrolled in
the employer’s health insurance plan.
(ii) 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 the credit.

E. Determining the Employer’s Average
Annual Wages for the Taxable Year
The average annual wages paid by an
employer for a taxable year is determined
by dividing (1) the total wages paid by
the employer during the employer’s taxable year to employees taken into account
under section II.B of this notice by (2) 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 section II.C of this notice are taken into
account. Wages for this purpose means
wages as defined under section 3121(a) for
purposes of the Federal Insurance Contributions Act (FICA), determined without
regard to the wage base limitation under
section 3121(a)(1).
Example 5 — Determining the amount of average
annual wages. (i) For the 2010 taxable year, an employer pays $224,000 in wages and has 10 FTEs.
(ii) The employer’s average annual wages is:
$22,000 ($224,000 divided by 10 = $22,400, rounded
down to the nearest $1,000).

F. Premium Payments by the Employer
for the Taxable Year
Only premiums paid by the employer
for health insurance coverage are counted
in calculating the credit. If an employer
pays only a portion of the premiums for
the coverage provided to employees (with
employees paying the rest), only the por-

tion paid by the employer is taken into account. For example, if an employer pays
80 percent of the premiums for employees’
coverage (with employees paying the other
20 percent), the 80 percent paid by the employer is taken into account in calculating
the credit. For purposes of this credit, any
premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer. In calculating the credit for a taxable year beginning in 2010, an employer
may count all premiums paid by the employer in the 2010 tax year, including premiums that were paid in the 2010 tax year
before the Affordable Care Act was enacted.
G. Premiums for Health Insurance
Coverage under a Qualifying Arrangement
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. As noted in section II.A
of this notice, a qualifying arrangement 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 (but see section V of this notice for transition relief for
taxable years beginning in 2010 with respect to certain requirements for a qualifying arrangement).
For years prior to 2014, health insurance coverage for purposes of the credit
means benefits consisting of medical care
(provided directly, through insurance or
reimbursement, or otherwise) under any
hospital or medical service policy or certificate, hospital or medical service plan
contract, or health maintenance organization contract offered by a health insurance
issuer. See section 9832(b)(1). Health
insurance coverage for purposes of the section 45R credit also includes the following
plans described in section 9832(c)(2), (3)
and (4): limited scope dental or vision;
long-term care, nursing home care, home
health care, community-based care, or
any combination thereof; coverage only

for a specified disease or illness; hospital
indemnity or other fixed indemnity insurance; and Medicare supplemental health
insurance; certain other supplemental coverage, and similar supplemental coverage
provided to coverage under a group health
plan. Health insurance coverage does
not include the benefits listed in section
9832(c)(1).2 If an eligible small employer
offers any of the plans described in section 9832(b)(1) or 9832(c)(2), (3) or (4),
the premiums paid by the employer for
that plan can be counted in calculating the
credit if the premiums are paid under a
qualifying arrangement.
Different types of health insurance
plans are not aggregated for purposes
of meeting the qualifying arrangement
requirement. So, for example, if an employer offers a major medical insurance
plan and a stand-alone vision plan, the
employer must separately satisfy the requirements for a qualifying arrangement
with respect to each type of coverage.
The amount of an employer’s premium
payments that are 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 State (or an area within
the State) in which the employer offers
coverage were substituted for the actual
premium. For example, if an eligible small
employer pays 80 percent of the premiums
for coverage provided to employees (and
employees pay the other 20 percent), the
premiums taken into account for purposes
of the credit are the lesser of 80 percent
of the total actual premiums paid or 80
percent of the premiums that would have
been paid for the coverage if the average
premium for the small group market in the
State (or an area within the State) were
substituted for the actual premium. See
Rev. Rul. 2010–13, 2010–21 I.R.B. 691,
for the average premium for the small
group market in a State for the 2010 taxable year.
The average premium for the small
group market in the State does not apply
separately to each type of coverage described in section 9832(b)(1), (c)(2), (c)(3)
and (c)(4), but rather provides an overall

2

Section 9832(c)(1) includes the following benefits: (A) coverage only for accident, or disability income insurance, or any combination thereof; (B) coverage issued as a supplement to
liability insurance; (C) liability insurance, including general liability insurance and automobile liability insurance; (D) worker’s compensation or similar insurance; (E) automobile medical
payment insurance; (F) credit-only insurance; (G) coverage for on-site medical clinics; and (H) other similar insurance coverage, specified in regulations, under which benefits for medical
care are secondary or incidental to other insurance benefits.

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719

2010–22 I.R.B.

cap for all health insurance coverage provided by an eligible small employer.

III. CALCULATING THE CREDIT

Example 6 — Determining amount of premium
payments for purposes of the credit. (i) For the 2010
taxable year, an eligible small employer offers a
health insurance plan with single and family coverage. Employer has 9 FTEs with average annual
wages of $23,000 per FTE. Four employees are enrolled in single coverage and 5 are enrolled in family
coverage.
(ii) The employer pays 50% of the premiums for
all employees enrolled in single coverage and 50%
of the premiums for all employees enrolled in family coverage (and the employee is responsible for the
remainder in each case). The premiums are $4,000 a
year for single coverage and $10,000 a year for family
coverage. The average premium for the small group
market in employer’s State is $5,000 for single coverage and $12,000 for family coverage.
(iii) The employer’s premium payments for each
FTE ($2,000 for single coverage and $5,000 for family coverage) do not exceed 50% of the average premium for the small group market in employer’s State
($2,500 for single coverage and $6,000 for family
coverage).
(iv) Thus, the amount of premiums paid by the
employer for purposes of computing the credit equals
$33,000 ((4 x $2,000) plus (5 x $5,000)).
Example 7 — Premium payments exceeding average premium for small group market. (i) Same facts
as Example 6, except that the premiums are $6,000
for single coverage and $14,000 for family coverage.
(ii) The employer’s premium payments for each
employee ($3,000 for single coverage and $7,000
for family coverage) exceed 50% of the average premium for the small group market in the employer’s
State ($2,500 for single coverage and $6,000 for
family coverage).
(iii) Thus, the amount of premiums paid by the
employer for purposes of computing the credit equals
$40,000 ((4 x $2,500) plus (5 x $6,000)).
Example 8 — Offering health insurance plan and
dental plan. (i) For the 2010 taxable year, an eligible small employer offers a major medical plan and a
dental plan. The employer pays 50% of the premium
cost for single coverage for all employees enrolled in
the major medical plan and 50% of the premium cost
for single coverage for all employees enrolled in the
dental plan.
(ii) For purposes of calculating the credit, the employer can take into consideration the premiums paid
by the employer for both the major medical plan and
the dental plan, but only up to 50% of the amount of
the average premium for single coverage for the small
group market in the employer’s State.
Example 9 — Meeting qualifying arrangement requirement. (i) Same facts as Example 8, except that
the employer pays 40% of the premium cost for single coverage for all employees enrolled in the dental
plan.
(ii) For purposes of calculating the credit, the employer can take into consideration only the premiums
paid by the employer for the major medical plan, and
only up to 50% of the amount of the average premium
for single coverage for the small group market in the
employer’s State. The employer cannot take into consideration premiums paid for the dental plan.

A. In General

2010–22 I.R.B.

The following steps are followed to calculate the section 45R credit:
1. Calculate the maximum amount of
the credit (section III.B);
2. Reduce the maximum credit in step 1
in accordance with the phaseout rule (section III.C), if necessary; and
3. For employers receiving a State
credit or subsidy for health insurance, determine the employer’s actual premium
payment (section III.D).
B. Maximum Credit
For taxable years beginning in 2010
through 2013, the maximum credit is 35
percent of a taxable eligible small employer’s premium payments taken into account for purposes of the credit. For a taxexempt eligible small employer for those
years, the maximum credit is 25 percent of
the employer’s premium payments taken
into account for purposes of the credit.
However, for a tax-exempt employer, the
amount of the credit cannot exceed the total amount of income tax under section
3402 and Medicare (i.e., Hospital Insurance) tax under section 3101(b) that the
employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax under section
3111(b) on employees’ wages for the year.
C. Credit Phaseout
The credit phases out gradually (but not
below zero) for eligible small employers
if the number of FTEs exceeds 10 or if
the average annual 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 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 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

720

the credit to which the employer is entitled. For an employer with both more
than 10 FTEs and average annual wages
exceeding $25,000, the total reduction is
the sum of the two reductions. This may
reduce the credit to zero for some employers with fewer than 25 FTEs and average
annual wages of less than $50,000.
Example 10 — Calculating the maximum credit
for a taxable eligible small employer. (i) For the 2010
taxable year, a taxable eligible small employer has
9 FTEs with average annual wages of $23,000 per
FTE. The employer pays $72,000 in health insurance
premiums for those employees (which does not exceed the average premium for the small group market in the employer’s State) and otherwise meets the
requirements for the credit.
(ii) The credit for 2010 equals $25,200 (35% x
$72,000).
Example 11 — Calculating the maximum credit
for a tax-exempt eligible small employer. (i) For
the 2010 taxable year, a tax-exempt eligible small
employer has 10 FTEs with average annual wages
of $21,000 per FTE. The 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 employer’s State) and otherwise
meets the requirements for the credit. The total
amount of the employer’s income tax and Medicare
tax withholding plus the employer’s share of the
Medicare tax equals $30,000 in 2010.
(ii) The credit is calculated as follows:
(1) Initial amount of credit determined before any
reduction: (25% x $80,000) = $20,000
(2) Employer’s withholding and Medicare taxes:
$30,000
(3) Total 2010 tax credit equals $20,000 (the
lesser of $20,000 and $30,000).
Example 12 — Calculating the credit phase-out
if the number of FTEs exceeds 10 or average annual
wages exceed $25,000. (i) For the 2010 taxable year,
a taxable eligible small employer has 12 FTEs and average annual wages of $30,000. The 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 employer’s State) and
otherwise meets the requirements for the credit.
(ii) The credit is calculated as follows:
(1) Initial amount of credit determined before any
reduction: (35% x $96,000) = $33,600
(2) Credit reduction for FTEs in excess of 10:
($33,600 x 2/15) = $4,480
(3) Credit reduction for average annual wages in
excess of $25,000: ($33,600 x $5,000/$25,000) =
$6,720
(4) Total credit reduction: ($4,480 + $6,720) =
$11,200
(5) Total 2010 tax credit equals $22,400 ($33,600
- $11,200).

D. State Credits and State Subsidies for
Health Insurance
Some States offer tax credits to certain small employers that provide health
insurance to their employees. Some of
these are refundable credits and others are

June 1, 2010

nonrefundable credits. In addition, some
States offer premium subsidy programs for
certain small employers under which the
State makes a payment equal to a portion
of the employees’ health insurance premiums under the employer-provided health
insurance plan. Generally, the State pays
this premium subsidy either directly to the
employer or to the employer’s insurance
company (or another entity licensed under State law to engage in the business
of insurance). If the employer is entitled to a State tax credit (whether refundable or nonrefundable) 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 “qualifying arrangement” requirement to pay an
amount equal to a uniform percentage (not
less than 50 percent) of the premium cost.
Also, except as described below in this
section III.D, the maximum amount of the
section 45R credit is not reduced by reason
of a State tax credit (whether refundable or
nonrefundable) or by reason of payments
by a State directly to an employer.
Generally, 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 under employer-provided health
insurance (State direct payments), the
State is treated as making these payments
on behalf of the employer for purposes
of determining whether the employer has
satisfied the “qualifying arrangement”
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 this
section III.D, these premium payments by
the State are treated as an employer contribution under section 45R for purposes
of calculating the credit.
Although State tax credits and payments to an employer generally do not
reduce an employer’s otherwise applicable credit under section 45R, and although
State direct payments are generally treated
as paid on behalf of an employer, in no
event may the amount of the section 45R
credit exceed the amount of the employer’s
net premium payments. In the case of a
State tax credit for an employer or a State
subsidy paid directly to an employer, the

June 1, 2010

employer’s net premium payments are calculated by subtracting the State tax credit
or subsidy from the employer’s actual
premium payments. In the case of a State
payment directly to an insurance company
(or another entity licensed under State law
to engage in the business of insurance),
the employer’s net premium payments are
the employer’s actual premium payments.
If a State-administered program (such
as Medicaid or another program that
makes payments directly to a health care
provider or insurance company on behalf of individuals and their families who
meet certain eligibility guidelines) makes
payments that are not contingent on the
maintenance of an employer-provided
group health plan, those payments are
not taken into account in determining the
credit under section 45R.
Example 13 — State premium subsidy paid directly to employer. (i) Employer’s State 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 the employer.
(ii) Employer has one employee, Employee D.
Employee D’s health insurance premiums are $100
per month and are paid as follows: $80 by the 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 section 45R credit.
(iii) For purposes of the requirements for a qualifying arrangement, and for purposes of calculating
the amount of the section 45R 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).
Example 14 — State premium subsidy paid
directly to employer’s insurance company. (i) Employer’s State provides a health insurance premium
subsidy of up to 50% for each eligible employee. The
State pays the premium directly to the employer’s
health insurance provider.
(ii) Employer has one employee, Employee E.
Employee E is enrolled in single coverage under Employer’s health insurance plan.
(iii) Employee E’s health insurance premiums are
$100 per month and are paid as follows: $30 by the
employer; $50 by the State and $20 by the employee.
The State pays the $50 per month directly to the insurance company and the insurance company bills
the employer for the employer and employee’s share,
which equal $50 per month. Employer is otherwise
an eligible small employer that meets the requirements for the section 45R credit.
(iv) For purposes of the requirements for a qualifying arrangement, and for purposes of calculating
the amount of the section 45R credit, the amount of
premiums paid by the employer is $80 per month (the
sum of the employer’s payment and the State’s payment).

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Example 15 — Credit limited by employer’s net
premium payment. (i) Employer’s State provides a
health insurance premium subsidy of up to 50% for
each eligible employee. The State pays the premium
directly to the employer’s health insurance provider.
Employer has one employee, Employee F. Employee
F is enrolled in single coverage under Employer’s
health insurance plan. Employee F’s health insurance
premiums are $100 per month and are paid as follows:
$20 by the employer; $50 by the State and $30 by the
employee. The State pays the $50 per month directly
to the insurance company and the insurance company
bills the employer for the employer’s and employee’s
shares, which total $50 per month. Employer is otherwise an eligible small employer that meets the requirements for the section 45R credit.
(ii) The amount of premiums paid by the employer for purposes of determining whether the employer meets the qualifying arrangement requirement
(the sum of the 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 maximum section
45R credit is also $70 per month. The maximum
credit is $24.50 ($70 x 35%).
(iii) The employer’s net premium payment is $20
(the amount actually paid by the employer excluding
the State subsidy). After applying the limit for the
employer’s net premium payment , the section 45R
credit is $20 per month, (the lesser of $24.50 or $20).

IV. CLAIMING THE CREDIT AND
EFFECT ON ESTIMATED TAX,
ALTERNATIVE MINIMUM TAX AND
DEDUCTIONS
The section 45R credit is claimed on an
eligible small employer’s annual income
tax return and offsets an employer’s actual tax liability for the year. For a taxexempt eligible small employer, the IRS
will provide further information on how to
claim the credit. For an eligible small employer that is not a tax-exempt employer,
the credit is a general business credit and,
thus, any unused credit amount can be carried back one year and carried forward 20
years (however, because an unused credit
amount cannot be carried back to a year before the effective date of the credit, any unused credit amounts for taxable years beginning in 2010 can only be carried forward). For a tax-exempt eligible small employer, the credit is a refundable credit,
so that even if the employer has no taxable income, the employer may receive a
refund (so long as it does not exceed the
tax-exempt eligible small employer’s total
income tax withholding and Medicare tax
liability for the year).
The credit can be reflected in determining estimated tax payments for the year
in which the credit applies in accordance

2010–22 I.R.B.

with regular estimated tax rules. The credit
can also be used to offset an employer’s
alternative minimum tax (AMT) liability
for the year, subject to certain limitations
based on the amount of an 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, because the credit applies against income tax, an employer may not reduce employment tax (i.e., withheld income tax,
social security tax under sections 3101(a)
and 3111(a), and Medicare tax) deposits
and payments during the year in anticipation of the credit. Finally, no deduction
is allowed for the employer under section
162 for that portion of the health insurance
premiums which is equal to the amount of
the section 45R credit.
V. TRANSITION RELIEF FOR
TAXABLE YEARS BEGINNING IN
2010
Because the section 45R credit applies
to taxable years beginning in 2010 (including the period in 2010 before enactment of
the Affordable Care Act), an employer that
satisfies the requirements for the transition
relief in this section V will be deemed to
satisfy the requirement for a qualifying arrangement that the employer pay a uniform percentage (not less than 50 percent)
of the premium cost of the health insurance coverage (uniformity requirement).
Specifically, for taxable years beginning
in 2010, an employer that pays an amount
equal to at least 50 percent of the premium for single (employee-only) coverage
for each employee enrolled in coverage offered to employees by the employer will be
deemed to satisfy the uniformity requirement for a qualifying arrangement, even if
the employer does not pay the same percentage of the premium for each such em-

2010–22 I.R.B.

ployee. Thus, an employer will be deemed
to satisfy the uniformity requirement for a
qualifying arrangement if it pays at least 50
percent of the premium for single coverage
for each employee receiving single coverage, and, if the employer offers coverage
that is more expensive than single coverage (such as family or self-plus-one coverage), if it pays an amount for each employee receiving that more expensive coverage that is no less than 50 percent of the
premium for single coverage for that employee (even if it is less than 50 percent of
the premium for the more expensive coverage the employee is actually receiving).
Example 16 — Transition relief rule for a qualifying arrangement. (i) For the 2010 taxable year, an
eligible small employer has 9 FTEs with average annual wages of $23,000 per FTE. Six employees are
enrolled in single coverage and 3 employees are enrolled in family coverage.
(ii) The premiums are $8,000 for single coverage
for the year and $14,000 for family coverage for the
year (which do not exceed the average premiums for
the small group market in the employer’s State). The
employer pays 50% of the premium for single coverage for each employee enrolled in single or family coverage (50% x $8,000 = $4,000 for each employee).
(iii) Thus, the employer pays $4,000 of the premium for each of the 6 employees enrolled in single
coverage and $4,000 of the premium for each of the
3 employees enrolled in family coverage.
(iv) The employer is deemed to satisfy the uniformity requirement for a qualifying arrangement under
the transition relief rule.
Example 17 — Arrangement that does not satisfy
requirement for transition relief. (i) Same facts as Example 16, except that the employer pays 50% of the
premium for employees enrolled in single coverage
($4,000 for each of those 6 employees) but pays none
of the premium for employees enrolled in family coverage.
(ii) The employer does not satisfy the uniformity
requirement for a qualifying arrangement.

REQUEST FOR COMMENTS
The IRS and Treasury intend to issue
future guidance that will address additional issues under section 45R, including
the application of the uniformity requirement and the 50-percent requirement for
taxable years beginning after 2010. Comments are requested on issues that should
be addressed in that future guidance.
Comments should be submitted on or
before September 1, 2010, and should
include a reference to Notice 2010–44.
Send submissions to CC:PA:LPD:PR
(Notice 2010–44), Room 5203, Internal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (Notice 2010–44),
Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, DC 20044, or sent electronically, via the following e-mail address:
[email protected].
Please include “Notice 2010–44” in
the subject line of any electronic
communication. All material submitted
will be available for public inspection and
copying.
DRAFTING INFORMATION
The principal author of this notice is
Mireille Khoury of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact Ms. Khoury at (202) 622–6080 (not a
toll-free call).

VI. EFFECTIVE DATE
Section 45R is effective for taxable
years beginning after December 31, 2009.

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June 1, 2010