Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees qualify for a special tax credit authorized by the Affordable Care Act (“Obamacare”). The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.
The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many small employers will qualify even if they employ more than 25 individual workers.
The maximum credit goes to smaller employers (those with 10 or fewer FTEs) paying annual average wages of $25,000 or less.
Key Point. The law does not exclude religious organizations from this credit. It states that the term “tax-exempt eligible small employer” means “an eligible small employer which is any organization described in section 501(c) which is exempt from taxation under section 501(a).” This language applies to all public charities, including religious organizations.
For tax years 2010 through 2013, the maximum credit was 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as churches.
For tax years beginning in 2014 or later, there will be changes to the credit:
The maximum credit will increase to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace (healthcare.gov/marketplace/shop/).
The credit will be available to eligible employers for two consecutive taxable years.
The credit is refundable, which is good news for churches that have no taxable income. This means that churches are eligible to receive the credit as a refund so long as it does not exceed their income tax withholding and Medicare tax liability.
To be eligible, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 (as adjusted for inflation beginning in 2014) per year. Remember, you will have to purchase insurance through the SHOP Marketplace to be eligible for the credit for tax years 2014 and beyond.
Two half-time workers count as one FTE. That means 20 half-time employees are equivalent to 10 FTEs, which makes the number of FTEs 10, not 20. To figure average annual wages you divide total wages the church pays its employees by the number of FTEs.
The amount of the credit you receive works on a sliding scale—the smaller the church, the bigger the credit. So if you have more than 10 FTEs, or if the average wage is more than $25,000 (as adjusted for inflation beginning in 2014), the amount of the credit you receive will be less.
The credit is claimed on IRS Form 8941 (Credit for Small Employer Health Insurance Premiums). For detailed information on filling out this form, see the instructions for Form 8941.
Key Point. If you think your church may be eligible for the credit, contact a tax professional for assistance. There are many smaller churches that qualify for the credit but fail to apply for it.