Health Care Tax Credit

Many eligible small tax-exempt employers may not be aware that they may be entitled to claim the Small Business Health Care Tax Credit, enacted as part of the Affordable Care Act in March 2010.

The Internal Revenue Service has released final guidance and updated forms and other resources for qualifying nonprofits to claim the small employer health credit for the 2010 tax year. Eligible nonprofits (those with fewer than 25 FTEs (full-time equivalents) that meet certain salary measures) may receive a payroll tax credit of up to 25 percent of their contribution to their employees’ health care coverage.

The credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have.

In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 35 percent of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers — those with 10 or fewer full-time equivalent (FTE) employees — paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of full-time equivalent employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

Tax-exempt organizations will first use Form 8941 to figure their refundable credit, and then claim the credit on Line 44f of Form 990-T. Though primarily filed by those organizations liable for the tax on unrelated business income, Form 990-T will also be used by any eligible tax-exempt organization to claim the credit, regardless of whether they are subject to this tax.

More information about the credit, including a step-by-step guide to claiming the credit is at www.irs.gov/newsroom/article/0,,id=220809,00.html, and answers to frequently asked questions are at www.irs.gov/newsroom/article/0,,id=220839,00.html.

The new Form 8941, Credit for Small Employer Health Insurance Premiums is at www.irs.gov/pub/irs-pdf/f8941.pdf, and the newly revised Form 990-T at www.irs.gov/pub/irs-pdf/f990t.pdf. The instructions to Form 8941 are at www.irs.gov/pub/irs-pdf/i8941.pdf and Notice 2010-82 at www.irs.gov/pub/irs-drop/n-10-82.pdf.

HHS has additional information on the credit at www.healthcare.gov/news/blog/smallbusiness09072011.html.

This article originally appeared in the January 2011 issue of New York Nonprofits,
the monthly publication of the Nonprofit Coordinating Committee of New York, Inc. www.npccny.org
revised September 7, 2011