Small Employer Health Credit

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.

• In Phase I (2010-2013), small nonprofit employers can take a credit (in the form of 25% of the employer contribution for employee insurance premiums) and apply that credit to taxes withheld through payroll (and employees would still get full credit for taxes withheld from their pay).
• In Phase II (2014-onward), the amount of the credit increases to 35%.

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:

• What is the maximum health insurance credit amount a nonprofit employer can claim in 2010? If the nonprofit employs 10 or fewer workers with average annual wages of no more than $25,000, the full 25% credit can be applied to the aggregate amount of actual premiums paid by employer [or a lesser average premium amount in the state, as may be determined by the U.S. Department of Health and Human Services (HHS)]. The nonprofit must pay at least 50% of the employee premium to qualify.
• How much is the credit if I employ more than 10 employees and/or if average pay is more than $25,000? The calculation of the phase out is complicated and should be determined with the help of an accountant. Here is a general rule of thumb for estimating the benefit of the credit:

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.

• 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 a newly created exchange.

Additional Resources

• NEW IRS Guidance on the Credit
• IRS Tax Tips
• IRS Three-step Eligibility Guide
• IRS Examples of Qualifiying Emplyers
• IRS Frequently Asked Questions
• HHS State Average Premium Amounts
• Representative Betty McCollum's Letter to the Speaker on behalf of nonprofits
• National Council letter to Speaker Pelosi regarding the small employer credit
• “Nonprofits: We Must Start Beating the Drum”
• “Nonprofit Groups Upset at Exclusion from Health Bills” New York Times 9/13/2009
• Health Care and Nonprofits: the Hidden Dimension of America’s Health Care Crisis, Johns Hopkins University Listening Post Project,  September 2009

Updated June 3, 2010