Small Employer Health Care Tax Credit
Important Update: Small Employer Health Care Tax Credit (updated January 6, 2011)
As we posted in early December, The IRS has issued final regulations, effective December 2 for tax years ending December 31, 2010. They are not done yet, because the 2010 990-T form is still in draft form, but everything else has been published. Now is the time for you to review your congregation’s eligibility for this substantial tax credit, discuss the procedures with your tax advisor, and pull together the necessary records. At the end of this posting are links to the IRS reference material and links to the forms your congregation will need.
This is also a good time to review your employment record-keeping procedures. The complexity of the credit calculation demands that employers keep accurate records of coverage offers made to staff, acceptances and rejections of coverage, and documentation of actual hours worked for all hourly staff, and establish uniform rules for attributing hours worked for all salaried staff, not in excess of 2080 hours per year. Congregations that participate in the Unitarian Universalist Association (UUA) Health Plan have heard this advice before, because our Plan auditors require that the data be available for review. All congregations need to apply the same standards as a matter of good business practice.
Eligibility for the credit and the instructions include non-profits, specifically defined as 501 (c) organizations. The Q&A says that non-profits will be able to take the credit as a refund by filing a 990-T after December 31, 2010. The credit is available to congregations that offered the UUA Health Plan or coverage from another insurer.
Filing for the refund will be an annual event, even for non-profits. (For-profit businesses will take the credit when they file their annual income tax returns.) Claiming the credit quarterly with your withholding filings is specifically barred.
Nearly all congregations will qualify based on size, less than 25 Full Time Equivalents (FTE’s); the IRS uses 2080 hours per year as one FTE. The full credit is available up to 10 FTE’s and scales to zero at 25 FTE’s. Ordained clergy are counted in the FTE calculation, as long as they are otherwise considered employees under common law, which for our congregations will generally mean separating W-2 employees (included) from contractor/1099 employees (excluded).
Maximum Credit of 25% Premium Paid
The maximum credit for non-profits is 25% of premium paid by the congregation, not including employee contributions (up to a state-by-state max that may come into play for some congregations; see the Form 8941 instructions), but many congregations will not qualify for the full 25%, based on average wages. The full 25% is available for an average wage of up to $25,000 and scales to zero at $50,000 (and this reduction is in addition to the reduction for having more than 10 FTE’s). Because the calculation takes hours worked into account, a half time employee making $15,000 counts the same as a full time employee making $30,000. “Wages” is defined as FICA wages. All pay for ordained clergy, including salary and housing allowance is specifically excluded, which will help more congregations qualify.
The rules require that employer contributions for all enrolled employees be at least 50% of the single (employee-only) cost, without regard to full time vs. part time status. Pro-rating of contributions below 50% for part-timers is not permitted. For 2010, employers are not required to have equal contribution %’s for all employees, as long as the 50% test is met. For tax years 2011-2013, it appears the IRS intends to begin enforcing the equal contribution rule for all staff, for employers that want to claim the credit.
Important Online References:
- Watch Richard Hammar's explanation of the Small Business Tax Credit
- IRS main website for the Small Business Health Care Tax Credit
- 3 Simple Steps (PDF): This is your first quick calculation, to see if your congregation qualifies based on size, average income, and contributions.
- Notice 2010-82, Section 45R: Tax Credit for Employee Health Insurance Expenses of Small Employers (This is the primary instruction set)
- Notice 2010-44 (PDF, 6 pages): Section V is still effective
- Tax Credit FAQ’s: This Q&A has good examples of how the calculations work.
- Form 990-T (PDF, 4 pages)
- Form 990-T Instructions (PDF, 23 pages)
- Form 8941 (PDF): This is the form your congregation will use to calculate the tax credit
- Form 8941 instructions (PDF, 8 pages): Include state-by-state caps.
For more information contact healthinsurance @ uua.org.
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Last updated on Wednesday, February 15, 2012.
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