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The IRS is allowing Iowa businesses to claim the tax credit for employer-provided health insurance purchased outside of a SHOP exchange.

Navigating health reform

Health Care Credit Gives Relief for Small Iowa Employers

  • 2/12/2015

Since 2010, small employers have been able to claim a tax credit for providing group health insurance to their employees. Beginning in 2014, the credit rate increased, although eligibility narrowed significantly: Only employers acquiring group health coverage through a SHOP exchange (Small Business Health Options Program) may claim the credit.

But businesses in 84 of 99 Iowa counties lack access to group insurance through a SHOP exchange in 2015, and the IRS has recently issued special relief that allows these employers to claim the credit for employer-provided health insurance purchased outside of the SHOP.

“Very few employers could claim this credit in 2014 because of the SHOP requirement,” says Trevor Huisman, a tax manager with CliftonLarsonAllen in Des Moines. “But for 2015, this opens the door again to most Iowa small employers, at least for a one-time opportunity.”

The small employer health care credit

The credit, authorized by IRC Sec. 45R, is calculated as a percentage of employer-paid health insurance premiums. For tax years beginning in 2014 and after, the percentage is 50 percent for taxable employers and 35 percent for tax-exempt employers. Taxable employers claim the credit as an offset to both regular tax and alternative minimum tax; tax-exempt employers apply for a direct payment from the IRS, but are limited to a portion of the employer’s payroll taxes for the year.

The credit is fully available if the number of employees is under 10 and the average annual wage per employee (excluding owners and their family members) is under $25,000. A reduced credit is allowed as the number of employees increases from 10 to 25. The credit also phases down as the average annual wage per employee increases from $25,000 to $50,000.

The SHOP requirement

For tax years beginning in 2014 and after, the credit is only available if the employer purchases its group health coverage through a SHOP exchange, whether state-established or a federally facilitated exchange. Further, the credit is limited to two consecutive years, beginning with the first taxable year in which the employer actually claims the credit under the new SHOP-based rules.

Special Iowa relief

For 2015, the IRS noted that most Iowa counties do not have health plans available through the SHOP exchange, and accordingly, employers in those locations would not have access to the small employer health care credit. As a result, the IRS issued special transition relief (Notice 2015-8).

To qualify for the special relief, the small employer must meet three criteria:

  • Have its principal business address in one of the counties listed below
  • Provide health insurance that satisfied the pre-SHOP requirement of this credit, including a requirement that the employer pay at least 50 percent of the single coverage premium
  • Apply the transition relief for its health plan year beginning in 2015

Iowa counties eligible for relief Adair, Adams, Appanoose, Audubon, Benton, Black Hawk, Boone, Bremer, Buchanan, Buena Vista, Butler, Calhoun, Carroll, Cass, Cedar, Cerro Gordo, Cherokee, Chickasaw, Clarke, Clinton, Crawford, Dallas, Davis, Decatur, Delaware, Des Moines, Dubuque, Floyd, Franklin, Fremont, Greene, Grundy, Guthrie, Hamilton, Hancock, Hardin, Harrison, Henry, Humboldt, Iowa, Jackson, Jasper, Jefferson, Johnson, Jones, Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska, Marion, Marshall, Mills, Mitchell, Monona, Monroe, Montgomery, Muscatine, Page, Palo Alto, Pocahontas, Polk, Pottawattamie, Poweshiek, Ringgold, Sac, Scott, Shelby, Story, Tama, Taylor, Union, Van Buren, Wapello, Warren, Washington, Wayne, Webster, Winnebago, Worth, Wright.

Health plan year versus tax year

Most small employers, whether organized as a proprietorship, partnership, or S corporation, report for tax purposes on the calendar year. However, these tax credit relief rules tie to the health plan year, which is the period of health insurance coverage under the employer-provided policy. The relief rules apply to the health plan year beginning in 2015, which might extend into 2016.

For example, assume that a small Iowa employer renews its group health policy each April 1, and continued with its non-SHOP Blue Cross policy for the period from April 1, 2014 through March 31, 2015. It was not eligible for the health care credit. But if the employer continued that same policy for the period from April 1, 2015 through March 31, 2016, and if its principal business location is in one of the 84 Iowa counties, it may claim the 50 percent tax credit (or 35 percent credit if a tax-exempt employer) for employer-paid premiums from April 1, 2015 through March 31, 2016.

How we can help

“The credit can be lucrative,” says Fred Paulsen, a CLA tax manager in Cedar Rapids. “Fifty percent of employer-paid premiums, even for a number of employees, can be a significant amount.” But the eligibility rules, especially those around determining the employee head count and computing average wages, can be complex. We can help Iowa employers that may qualify for the special access to this credit for your health plan year beginning in 2015.