Consultants & Advisors
Little Known Tax Credit for Small Nonprofits Tucked in
Health Reform Law
There’s a health reform tax
credit that could immediately help small nonprofits offering health insurance
coverage to employees. A lot of organizations haven’t noticed this opportunity
for savings because it’s lost amidst the “Affordable Care Act.”
Specifically, Congress is providing a 25 percent credit based on
the amount of health insurance premiums paid in 2010. The credit will be
offered until 2014, when state-run exchanges will be in operation.
“The rules about how to claim the credit are incredibly
complicated,” says Larry Adams, a nonprofit and government principal with
LarsonAllen. “The IRS has released a draft of the claim form which requires
eight separate computations.”
The credit is subject to certain limitations, and is targeted to
organizations that primarily employ moderate and lower-income workers. It can
be claimed by completing Form 8941, Credit for Small
Employer Health Insurance Premiums, which is still in draft
form and for which instructions have yet to be released.
The basic qualifying
requirements and limitations
To qualify for the credit, an eligible small employer (ESE) has to
meet all of the following requirements:
A qualified health plan
Twenty-five or fewer full-time equivalent (FTE) employees for
the tax year. (This number is determined by dividing the total hours worked by
all employees during the year by 2,080.)
Average annual wages not exceeding $50,000 for the tax year.
(Calculate the average annual wages by dividing the total wages by the number
of FTE employees. Then round that number down to the nearest $1,000.)
Contributions of at least 50 percent of the insurance premiums
for all eligible employees. (For the 2010 transition year, differing
percentages can be made as long as all employer payments are at least 50
percent of each employee’s premium—based on single coverage.)
There are limitations to claiming the credit, including:
The credit amount gradually phases out if the number of FTE
employees exceeds 10, or if the average annual wages exceed $25,000. Employers
with exactly 25 FTE employees or average annual wages exactly equal to $50,000 are
not eligible for the credit.
In certain circumstances, an organization that uses part-time or
seasonal help can qualify for the credit even if the entity employs more than
There are separate state-by-state ceilings on the premiums paid
and an overall cap based on the payroll taxes paid by the organization
(specifically, federal withholding and Medicare).
Only non-elective premiums qualify for the credit.
How to file a claim
The exact filing details aren’t
clear since the IRS has yet to publish the instructions for Form 8941. They are
expected to be released later this year. However, this much is already known:
Form 8941 will need to be attached to Form 990-T, Exempt
Organization Business Income Tax Return, which is normally filed when a
nonprofit has unrelated business income. If you pay unrelated business income
tax, it is likely that this credit will reduce the tax due. If no tax is due,
the credit is refundable.
Even if you do not have unrelated business income (e.g.
advertising income), you will need to file the 990-T in order to claim the
health care credit.
if you don’t have unrelated business income, you need to file the 990-T in order to claim the credit.
“By utilizing the 990-T as a vehicle
for claiming the credit, the IRS appears to be reinforcing the need for small
nonprofit employers to annually report all unrelated business income in excess
of $1,000,” notes Adams.
What you should do now
Since the tax credit is refundable, tax planning prior to year
end will help you understand if you qualify, and if you can increase the credit
amount for 2010.
List employees by name, title, hours worked, annual salary, and
premiums paid for health insurance in 2010.
Calculate your organization’s estimated eligible credit.
Determine if any tax planning before year-end will allow your
organization to increase the amount it may claim.
Have your calculations reviewed by a qualified professional.
How we can help
Exempt organizations could receive a significant refund by
filing the 990-T for 2010. However, since the return is subject to an audit by
the IRS, it is especially critical that the credit calculations are correct and
supported by the facts. LarsonAllen has developed a credit calculator to help
nonprofits determine if it qualifies and estimate how much the credit may be.