Many small tax-exempt organizations that provide health insurance coverage to their employees may now qualify for the Small Business Health Care Tax Credit. Recent health care reform legislation designed this federal income tax credit to encourage small employers to offer health care coverage for the first time or to maintain coverage they already provide.*
Even if they have no taxable income, eligible taxexempt organization employers may claim the credit to receive a refund for amounts paid to provide health care insurance for their employees.
Which Exempt Organizations Are Eligible for the Credit?
To be eligible for the credit, exempt organizations must be described under Section 501(c) of the Internal Revenue Code. They must provide health care coverage to their employees, generally by paying at least 50% of the premium cost of the coverage (after 2010, the premium percentage paid for each employee must be uniform). This 50% threshold is measured by the premium paid by the employer for actual coverage provided; however, in 2010, as a transition rule, this threshold will be met if the employer-paid premium is at least one-half of the amount of the premium paid for employeeonly coverage. This means that in 2010, even if coverage actually provided is for family or self-plus-one coverage, which tends to be more expensive than employee-only coverage, the threshold will still be met if the employer pays at least 50% of the premium for single coverage for its employees. The IRS will be issuing further guidance on this transition relief.
To be eligible for the credit, exempt organizations must also have fewer than 25 "full-time equivalent employees" and pay wages averaging less than $50,000 per employee per year. The IRS uses a simple formula based on the number of full- and part-time employees to determine the number of full-time equivalent employees. Because the formula is based on the number of full-time equivalent employees, rather than the number of employees, many organizations with some part-time employees may qualify for the credit, even if they employ more than 25 individual workers.
How Much Is the Credit?
The credit is calculated using a formula that is intended to provide larger credits for smaller organizations. For tax years beginning in 2010 through 2013, the maximum credit available for taxexempt organization employers generally is 25% of premiums paid by the employer organization. This maximum credit is available for tax-exempt organization employers that have 10 or fewer fulltime equivalent employees and that pay average wages of $25,000 or less. In 2014, the maximum credit will increase to 35% of premiums paid for eligible tax-exempt organization employers.
The amount of the 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 purposes of calculating the credit:
- Premiums paid in 2010 may be counted, even if they were paid before March 23, 2010, which is the date the credit was enacted by legislation.
- Only the amount of the premiums paid by the employer are counted, so premiums paid by employees do not count for purposes of calculating the credit.
- Additionally, the amount of the premium that counts for the purposes of calculating the credit generally cannot exceed the average premium for the small group market in the State (or area within the State). This average premium is determined by the Department of Health and Human Services and will be published by the IRS (the IRS has announced that this information will be posted on the IRS website at the end of April 2010).
- If an employer only paid a certain percent of the premium, the credit cannot exceed the same percentage of the average premium for the small group market in the State (or area within the State). So, for example, if an employer paid 80% for coverage and the employee paid the remaining 20%, the credit cannot exceed 80% of the average premium for the small group market in the State (or area within the State).
How Does My Organization Claim the Credit?
Because it is an income tax credit, the credit may not be applied against employment taxes; however, the credit is a refundable credit, which means that eligible organizations may receive a refund in the amount of the credit. The IRS will provide further information to tax-exempt employers on how to claim the credit.
* * * *
*A similar credit is also available for small businesses, which may claim the credit as part of the general business credit. This alert focuses on the credit available for taxexempt organization employers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
