8789 / Is the value of employer-provided coverage under accident or health insurance taxable income to an employee?
Eligible small employers may take advantage of a tax credit for employee health insurance expenses for taxable years beginning after December 31, 2009, provided the employer offers health insurance to its employees and makes a non-elective contribution on behalf of each employee who participates in the plan.1
An eligible small employer is defined as an employer that has no more than 25 full time employees, the average annual wages of whom do not exceed $61,400 (in 2023, $57,400 for 2022, $55,600 for 2021 and $55,200 for 2020).2
In order to qualify, the employer must have a contribution arrangement for each employee who enrolls in the health plan offered by the employer through an exchange that requires that the employer make a non-elective contribution in an amount equal to a uniform percentage, not less than 50 percent, of the premium cost.3
Subject to phase-out4 based on the number of employees and average wages, the amount of the credit is equal to 50 percent, and 35 percent in the case of tax-exempt organizations, of the lesser of:
(1)the aggregate amount of non-elective contributions made by the employer on behalf of its employees for health insurance premiums for health plans offered by the employer to employees through an exchange; or
(2)the aggregate amount of non-elective contributions the employer would have made if each employee had been enrolled in a health plan that had a premium equal to the average premium for the small group market in the ratings area.5
For years 2010 through 2013, the following modifications apply in determining the amount of the credit:
(1)The credit percentage is reduced to 35 percent (25 percent in the case of tax-exempt entities).6
(2)The amount under (1) is determined by reference to non-elective contributions for premiums paid for health insurance, and there is no exchange requirement.7
(3)The amount under (2) is determined by the average premium for the state small group market.8
The credit also is allowed against the alternative minimum tax.9
Planning Point: Proposed regulations explain how to calculate employer tax credits after 2013.10 The regulations propose that the maximum credit for taxable years after 2014 (available for only two years) increase to 50 percent (35 percent for tax-exempt organizations), with some adjustments. There is a proposed phase out for small employers with more than ten employees or whose average annual wages exceed $25,000 (adjusted for inflation). In addition, the proposed regulations clarify that employer contributions to an HRA, FSA, or HSA are not considered premium payments11 (See Q 8840.)
1. IRC § 45R, as added by PPACA 2010.
2. IRC § 45R(d), as added by PPACA 2010; IRC Sec. 45R(d)(3)(B), as amended by Section 10105(e)(1) of PPACA 2010.
3. IRC § 45R(d)(4), as added by PPACA 2010.
4. IRC § 45R(c), as added by PPACA 2010.
5. IRC § 45R(b), as added by PPACA 2010.
6. IRC § 45R(g)(2)(A), as added by PPACA 2010.
7. IRC § 45R(g)(2)(B), 45R(g)(3), as added by PPACA 2010.
8. IRC § 45R(g)(2)(C), as added by PPACA 2010.
9. IRC § 38(c)(4)(B), as amended by PPACA 2010. The IRS has issued guidance; see Notice 2010-44, 2010-22 IRB 717; Notice 2010-82, 2010-51 IRB 1.
10. 2013 IRB LEXIS, 2013-38 IRB 211 (modifying Notice 2010-44, 2010-22 IRB 717; Notice 2010-82, 2010-51 IRB 1).
11. Prop. Treas. Reg. §1.45R-3.