All qualified small employers – both nonprofits and for-profits – can claim a full or partial tax credit when they pay for at least half of the health insurance premiums for their employees. Nonprofit employers qualify for the full 25 percent credit if they
Employers may also qualify for part of the credit if they
Update: The Internal Revenue Service announced that nonprofits will see an 8.7 percent reduction in the savings they are otherwise entitled to under the Small Employer Health Credit as a result of sequestration.
The Small Employer Health Credit was enacted as part of the Patient Protection and Affordable Care Act. Sen. John Kerry (D-MA) and Rep. Frank Pallone (D-NJ) introduced a bill to expand the small employer health credit to help more nonprofits and small businesses provide health insurance to their employees. The bill would make employers with 50 or fewer employees (up from 25 employees) eligible, raise the ceiling on average earnings from $50,000 to $57,000, and eliminate complex rules.
The National Council of Nonprofits is working with the Government Accountability Office (GAO) to assess the effectiveness of this Small Employer Health Credit. The GAO has been tasked with reviewing the credit that nonprofit and for-profit employers may claim to help pay for employee health insurance. The most common concerns mentioned at a congressional hearing last year, and confirmed by several State Associations, are the very low salary thresholds and the complicated calculation needed to claim the credit. Nonprofits are encouraged to share with GAO their experiences in claiming the Small Employer Health Care Credit.
Small businesses and tax-exempt organizations will use the Form 8941 to calculate the small business health care tax credit when they file income tax returns next year. Eligible tax-exempt organizations that do not generally file income tax returns are still able to receive the credit in the form of a refund through any of the following types of withholdings (as long as the credit does not exceed the withholdings):
1. Employee or employer’s share of Medicare withholdings
2. Federal income tax withholdings employer withholds for employee
Tax-exempt organizations will claim the small business health care tax credit on a revised Form 990-T. The Form 990-T is currently used by tax-exempt organizations to report and pay the tax on unrelated business income. Form 990-T has been revised for the 2011 filing season to enable eligible tax-exempt organizations -- even those that owe no tax on unrelated business income -- also to claim the small business health care tax credit.
The small employer credit will help all small employers (defined as 25 or fewer employees and average wages below $50,000 per year) provide insurance to their employees.
The law treats for-profits and nonprofits differently in these respects: for-profits get a higher rate for the credit during both phases (35 percent in Phase I and 50 percent in Phase II), but nonprofits can claim the credit each pay period whereas for-profits must wait until year-end to claim an income tax credit, and then, only if they are profitable.
Nonprofits can claim the full 25 percent of the health credit if they pay at least half of the employee premium and employ fewer than 10 workers that are each paid average wages of less than $25,000. The employer can apply the full credit to the aggregate amount of actual premiums paid or a lesser average premium amount, as determined by the U.S. Department of Health and Human Services (HHS).
The Internal Revenue Service has also provided guidance, tax tips, guides, examples, and answers to frequently asked questions on its website and alerted small employers of the credit via a special postcard that was sent out in April.
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