The Affordable Care Act, enacted in 2010, includes a provision to encourage small organizations, including tax-exempts, to offer health insurance coverage to their employees. For tax years beginning in 2010 through 2013, the credit available to qualifying tax-exempt organizations is equal to 25% of the premiums paid. The credit will increase to 35% beginning in 2014.
In general, the maximum credit is available to organizations that have 10 or fewer full-time equivalent (FTE) employees with average annual wages of $25,000 or less. For employers over those limits the credit is phased out. The credit is completely phased out for organizations with more than 25 FTE employees or average annual wages are $50,000 or more. The number of FTE employees is calculated by dividing the total hours on which wages were paid (but not more than 2,080 hours per employee) by 2,080. Average wages are determined by dividing the total Medicare wages paid by the calculated number of FTE employees.
In order to qualify for the credit, the organization must pay at least 50% of the premium cost for single coverage for each employee enrolled in the health insurance coverage, or 100% if the coverage is through a multiemployer plan. The credit is limited to the total amount of income tax withheld plus the employee and employer Medicare tax on employees' wages for the year. In addition, the amount of the premium on which the credit can be claimed is limited to the average premium for small group markets in the state in which the employee works.
More information, including a guide to claiming the credit and frequently asked questions, is available on the Affordable Care Act Tax Provisions page on www.irs.gov.
By Donna A. Hubert, CPA, Partner, dhubert@legacycpas.com