Information about a Health Care Tax Credit Available to Tax-exempt Organizations

As part of the Affordable Care Act that was enacted this March, some small tax-exempt organizations are eligible to receive tax credits for providing health insurance coverage to their employees. As your trusted advisor, Watkins Uiberall, PLLC has provided the following information to help you determine if you are eligible and, if so, the appropriate steps to take to claim your credit.

Who:

Eligible small employers, including tax-exempt organizations, which make non-elective contributions toward their employees’ health insurance premiums under an arrangement that meets certain requirements.
Generally eligible:
- Fewer than 25 full-time equivalent employees (FTEs)
- Paying wages averaging less than $50,000 per employee per year
- Pays at least 50% of health insurance costs for employees

What:

The maximum credit is 25% of premiums paid by eligible employers that are tax-exempt organizations. In 2014, the maximum credit increases to 35%.

When:

For taxable years beginning after December 31, 2009

How:

Credit % multiplied by qualifying health care premiums paid = initial amount of credit
Credit reductions for FTEs or excess wages (see formulas above)
Subtract reductions from initial credit amount = total tax credit

Determining FTEs and Average Annual Wages:

FTEs: Total hours on which the employer pays wages during the year (not more than 2,080 per employee) divided by 2,080. (Round down to the next lowest whole number.) Seasonal workers are disregarded in determining FTEs. Also, salaried employees are treated as 1 FTE, regardless of actual hours worked.

Average Annual Wages: Total wages paid by employer divided by the number of FTEs for the year (Round down to the nearest $1,000). For this purpose, wages mean wages as defined for FICA purposes (without regard to the wage base limitation).

Additional Information:

The employer must pay at least 50% of the premium cost for each employee enrolled in coverage offered to employees by the employer. The requirement that the employer pay at least 50% of the premium for an employee applies to the premium for single (employee-only) coverage for the employee. Therefore, if the employee is receiving coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer satisfies the 50% requirement with respect to the employee if the employer pays an amount of the premium for such coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the coverage the employee is actually receiving).
Starting in 2014, businesses with more than 50 employees will be required to either offer healthcare coverage or pay a penalty of $750 per year per full-time worker. The coverage must meet minimum benefits.
Phase-out of credit: If the number of FTEs exceeds 10 or average annual wages exceed $25,000, the percent of premiums paid used to determine the credit is reduced.
Tax-exempt organization credit cannot exceed the total amount of income and Medicare tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages.
For a tax-exempt employer, the credit is a refundable credit, so even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the income tax withholding and Medicare tax liability).

If you have any questions or would like to discuss these tax credits in more detail, please do not hesitate to contact the tax professionals at Watkins Uiberall at 901.761.2720.