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Small Employer Health Credit

If your nonprofit has fewer than 25 full-time equivalent employees (FTEs) then it might be eligible for the “Small Business Health Care Tax Credit.” Any private employer (both for-profit and nonprofit) with fewer than 25 employees is considered to be a “small business,” which means that your nonprofit may be eligible for a refund on expenses that it pays towards employees' health insurance premiums. In order to be eligible for the refund the nonprofit must pay at least 50% of the premium for its employees’ health insurance, and average wages paid must be less than $50,000 per FTE. A bit of calculating is required to determine eligibility and what the refund amount will be – but depending on the amount of health insurance premiums paid by the nonprofit, receiving the refund could be a nice cash boost to advance your mission! - See more at: http://www.councilofnonprofits.org/category/news-item-type/nonprofit-knowledge-matters#sthash.DgLWsSK3.dpuf

If your nonprofit has fewer than 25 full-time equivalent employees, then it might be eligible for a refund as a result of the "Small Business Health Care Tax Credit" that is part of the Affordable Care Act. Any private emplyoer that has fewer than 25 full-time equivalent employees is considered to be a "small business" under the ACA, which means that your nonprofit may be eligible for a refund on expenses it paid to provide health insurance for its employees. In order to be eligible the nonprofit must pay for at least 50% of the single (not family) health care coverage and average wages of all employees must be no more than $50,000. IRS guidance explains all these details, as well as how to apply for the refund. Here's a recap:

Nonprofit employers qualify for the full 25 percent credit if they

  1. pay at least 50% of the cost of single (not family) health care coverage for each of your employees
  2. employ fewer than 10 full-time-equivalent employees,
  3. pay less than $25,000 in average wages per employee.

Employers may also qualify for part of the credit if they

  1. pay at least half the costs of employee’s single coverage health care plans,
  2. employ fewer than 25 full-time-equivalent employees,
  3. pay less than $50,000 in average wages per employee.

How can tax-exempt organizations claim the small business health care tax credit? Use the 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 to enable eligible tax-exempt organizations -- even those that owe no tax on unrelated business income --  to claim the small business health care tax credit by filing the form. Your nonprofit can file IRS Form 990-T to claim the refund even if your nonprofit does not otherwise need to file the IRS Form 990-T. Read the instructions to the Form 990-T. (And, since this credit has been available since 2011, your nonprofit can file the Form 990-T for past years if your nonprofit was eligible, but did not claim the credit at the time.) Note that 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 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. - See more at: http://www.councilofnonprofits.org/public-policy/federal-policy-issues/health-care-reform#sthash.v3QUNSO6.dpuf
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. - See more at: http://www.councilofnonprofits.org/public-policy/federal-policy-issues/health-care-reform#sthash.v3QUNSO6.dpuf

Frequently Asked Questions

  • What employees do I count? To determine the number of full-time equivalent employees, divide the total straight-time hours of paid work at your organization by 2080 (40 hours for 52 weeks). Overtime hours worked are not included in the calculation. Presumably salaried workers should be counted as working 2080 hours, but this will be clarified in the future by the Secretaries of the Treasury and Labor. The hours of leased employees are included, but you don’t count relatives and dependents of fiduciaries, nor seasonal workers working fewer than 120 days (such as camp counselors).
  • What wages count? Total wages paid, divided by the number of full time equivalents. The amount is rounded down to the nearest lowest multiple of $1,000.
  • How do I claim the credit? The small employer credit can be claimed against three of the payroll taxes that nonprofits regularly send into the IRS: the employer and employee share (combined total of 2.9%) of Medicare withholding, and the federal income taxes withheld by the employer on behalf of the employee. Employees will continue to get credit for their withheld income taxes payments. 
  • How long can I claim the credit? The credit is available immediately through 2013, and then for two additional years as long as insurance is purchased through the Marketplace.

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 2013.

Additional Resources