Small Nonprofits Can Start Claiming Credit Immediately
With the President’s signing of the Patient Protection and Affordable Care Act on March 23, 2010, all qualified small employers – both nonprofits and for-profits – can immediately claim a tax credit when they pay for at least half of the health insurance premiums for their employees. The full credit will be available to employers with 10 or fewer workers with average annual wages of $25,000, while firms with up to 25 or fewer employees and average annual wages of up to $50,000 will be eligible for part of the credit.
How It Works
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% in Phase I and 50% 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.
What You Need to Know
The Internal Revenue Service has recently provided guidance, tax tips, guides, examples, and answers to frequently asked questions on its website and is alerting small employers via a special postcard. The IRS and U.S. Department of Labor will be issuing official guidance in the future, but, in the spirit of helping people have a better understanding, here are preliminary answers to some initial questions:
Step 1: Multiply the amount the employer paid in health premiums (up to the average premium amount as determined by HHS) by the maximum nonprofit credit amount of 25%. Subtract from that amount either of the following calculations if they apply:
Step 2: Number of Employees (greater than 10): Start with the total number of full-time equivalent employees, subtract 10 and divide by 15. Multiply the dollar figure in Step 1 by this percentage.
Step 3: Average Wages (greater than $25,000): Subtract $25,000 from the average annual wages paid by the nonprofit, and divide that number by $25,000. Multiply the dollar figure in Step 1 by this new percentage.
Step 4: Subtract the totals from Step 2 and Step 3 from the amount in Step 1 to determine your credit.
As an example, assume a nonprofit employees 12 full time employees, pays average annual wages of $30,000 and contributes $100,000 to employee health insurance premiums (which is at least half of the cost of the premiums).
Step 1: Multiply the $100,000 premium contribution by the maximum nonprofit credit for 2010 of 25%, establishing the maximum savings of $25,000.
Step 2: Total number of employees (12) minus 10 = 2 divided by 15 = .1333, multiplied by the number in Step 1 ($25,000) = $3333.33.
Step 3: Average annual wages ($30,000) minus $25,000 = $5,000 divided by $25,000 = .2 multiplied by the number in Step 1 ($25,000) = $5,000.
Step 4: Number in Step 1 $25,000 minus Step 2 total (-$3333.33) and minus Step 3 total (-$5,000) = $16,666.67.
Updated June 3, 2010
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