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Health Care Credit for Religious Organizations

Amy Hendley

September 15, 2011

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Learning Objectives• This session will provide you with a more complete

understanding of the health insurance credit:– Health Insurance Credit Overview– Basic Provisions– Full-time Equivalents – Wage Limitations– Health Insurance Coverage– Employer Premiums– State Average Premiums– Calculating the Credit– Claiming the Credit

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What Happened?

• In March 2010, Congress passed and the President signed health reform in:– The Patient Protection and Affordable

Care Act

– The Health Care and Education Affordability Reconciliation Act of 2010.

◊ Increases access to health coverage ◊ Aims to reduce costs via payment reductions

and focus on wellness and prevention ◊ Seeks to reward “value-based” care delivery

• Impact of the Act:– Cost: $940 billion over 10 years

– Coverage: + 32 million by 2019

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Credit for Health Insurance Premiums

• Refundable Credit = 25% of Health Insurance Premiums Paid in 2010

• It’s Complicated! The calculation is subject to many rules, regulations and limitations.

• For years beginning in 2010:

- Calendar years ending December 31, 2010

- Fiscal years ending in 2011

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Credit for Health Insurance Premiums (cont’d)

• Tax credit for a percentage of employer-provided health insurance premiums paid during the tax year (IRC Sec. 45R)

Tax Yr. Beginning Tax Credit

2010-2013 25%

2014-2015 35%

Offset: UBI taxes or Refunded

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Unique Aspects of Church Plans

• Self-insured Church plans are qualifying plans for purposes of the credit

• Controlled group issues depend on the denomination

• Ordained minister hours are included in the FTE calculation if they are a common law employee

• Ordained minister wages are not included in the average wage calculation

• Premiums paid for benefits for ministers are included for calculating the base credit

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Calculating the Health Insurance Credit

Twelve step approach to calculating the credit:

1. Does the employer have a qualified health plan?2. Compute the qualified health care premiums3. Calculate total hours4. Calculate FTE’s 5. Do FTE’s exceed 25? 6. Calculate Total Qualified Wages7. Calculate Average Wages per FTE8. Do average wages exceed $50,000?9. Calculate the gross credit amount10. Calculate the average annual wage phase-out11. Calculate the FTE range phase-out12. Calculate the credit (Form 8941/Form 990-T)

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Step #1 Qualified Health Insurance Plan

1. Determine if the employer offers a qualified health insurance plan

• Employer pays at least 50% of premium for single coverage and at least the same amount for family coverage

• Uniform percentage or uniform amount: See Notice 2010-82, sec. III.G.

• Employer payments only; not employee portion• No employer costs for self-insured plans

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Step #1 Qualified Health Insurance Plan (cont.)

• Benefits consisting of medical care offered by a health insurance provider (an insurance company or other entity licensed under state law) to provide health insurance coverage

• Health insurance coverage includes:– Limited scope dental or vision plans

– Long-term care plans

– Nursing home care plans

– Medicare Supplemental health insurance

– Church welfare benefit plans

– Multi-employer heath and welfare plans

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Step #1 Qualified Health Insurance Plan (cont.)

• Health insurance does not include benefits provided by:– Health reimbursement arrangements (HRA’s)

– Flex spending arrangements (health FSA’s)

– Coverage under Self-insured plans

– Health savings accounts (HSA’s)

• Health insurance coverage does not include:– Coverage only for accident or disability income insurance

– Liability insurance

– Workers compensation

– Automobile medical insurance

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Step #2 Compute Premiums: Employer Premiums Paid

• Premiums paid are the basis for calculating the credit

• Only include premiums actually paid by the employer

• Any premiums paid through a salary reduction arrangement (cafeteria plan) are not treated as paid by the employer

• State credits or premium subsidies for health insurance do not reduce amounts paid

• Example: if employer pays 60% of health insurance coverage, then only 60% may be used in calculating the credit

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Step #2 Compute Premiums: State Average Premiums

• State average premiums act as an overall limit for premiums that may be used in calculating the credit

• IRS published a list of average premiums by state

Minnesota: Single $ 4,704 Family $11,938

• State average premiums must be reduced by percentage of insurance covered

Example, Minnesota employer covers 50% of employee health insurance – state limits reduced to $2,352 single and $5,969 family

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Step #2 Compute Premiums

2. Compute premiums, subject to state avg. limits– Use smaller of two sums:

Actual premiums paid by the employer State average per Rev. Rul. 2010-13

– Consistency: Same percentage of state average premium as percentage paid by employer, and for same period for new or terminated employees

– See Example Calculation of Computing Premiums

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Step #3 Calculate Total Hours3. Calculate total hours (to determine FTEs)• Include all employees, including:

-those who did not utilize health insurance benefits-those who are no longer employed at year-end-union employees (multi-employer plans)

-part time employees

• Leased employees (not common law) are included after the individual has performed services substantially full time for at least one year (first year of service is ignored)

• Seasonal employees (work 120 days or fewer)-exclude them from the FTE calculation but include insurance premiums paid

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Step #3 Calculate Total Hours (cont.)

3. Calculate total hours (to determine FTEs)• Use 2080 hours for all full-time employees:

-include all hours paid during the tax year-includes vacation, holiday, sick leave, disability, military duty or leave of absence (up to 160 hours)

• Three methods to calculate part-time employee hours:1. Actual hours worked – any paid hours2. Days-worked equivalency – count 8 hours for every day where at least one hour was worked

3. Weeks-worked equivalency – count 40 hours for every week where at least one hour was worked

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Step #3 Calculate Total Hours (cont.)

3. Calculate total hours (to determine FTEs)• May apply different methods for different classifications of

employees

e.g. actual hours for hourly and weeks-worked equivalency method for all salaried employees

• May change method of calculating hours of service for each taxable year

• Round down to the next whole number

• Need 25 or fewer FTE’s to qualify for the credit

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Step #3 Calculate Total Hours (cont.)

3. Calculate total hours (to determine FTEs)– Count hours of all employees, even if not in health

insurance plan– Exclude hours of seasonal employees

Seasonals <120 days and DOL definition

– Maximum hours per employee cannot exceed 2,080– See Example Calculation of Qualifying Hours

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Steps #4 and #5 Calculate FTEs; Less than 25?

4. Calculate FTEs• Divide qualifying hours by 2,080• Round result down to next lowest whole number (but

not lower than 1)• See example for calculation of FTE’s

5. Determine if FTEs exceeds 25• Example: 28,060 Qualified Hours divided by 2,080 =

12.49, but round down to 13.0

Strategy:If FTE < 10, consider using the “weeks-worked

equivalency” on part-time employees to increase FTE # (which will decrease average wages)

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Step #6 Calculate Total Qualified Wages

6. Calculate total qualified wages• Maximum Credit is earned when average wages are

$25,000 or less

• Use Medicare wages (ignore wage base limitation of $106,800)

• Exclude wages of seasonal employees

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Step #6 Calculate Total Qualified Wages (cont.)

• Qualified wages used to calculate average wages:

– Medicare taxable wages

– Exclude contributions to 401(k) or 403(b) plans

– Exclude contributions to cafeteria plans

– Ministers: ordained ministers are not considered employees so Medicare taxable wages are likely zero

• See example for calculation of qualifying wages

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Step #7 Calculate Average Wages per FTE

7. Calculate average wages • Divide qualifying tax year wages by the number

of FTE from Step 4

• Result rounded down to next lowest multiple of $1,000

– Result must be under $50,000

See example for calculation of average wages

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Step #8 Do Average Wages Exceed $50,000?

8. Test if average wages < $50,000

Qualified Wages from Example $365,910

Divided by FTE from Example 13

Average wages per FTE $ 28,000

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Step #9 Calculate the Gross Credit Amount

9. Calculate credit (rate x qualifying premiums)

Tax Yr. Beginning Exempt 501(c)

2010-2013 25%

2014-2015 35%

Limitation: Federal Tax

(Federal W/H and Medicare)

(Calendar Year 2010)

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Steps #10 and #11 Calculate the Phase-Outs

10. and 11. Calculate the phase-outs

Phase-out Range

Full Credit No Credit

• Average annual wages $25,000 $50,000• Number of FTE 10 25

– Each phase-out pro-rata and applied separately– Related business aggregated (using qual. ret. plan

rules)

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Phase-out for Exempt Employer (2010-2013)

No. Average Wages/FTEFTEs $25K $30K $40K $50K

<10 25% 20% 10% 0%

15 17% 12% 2% -

20 8% 3% - -

25 - - - -

Steps #10 and #11 Calculate the Phase-Outs

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Application of the Tax Credit Phase-out

See example for phase-out calculation

• Avg. wages: $31,000 – results in 12% phase-out

• FTEs: 13 – results in 20% phase out

• Total phase-out is 32%

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Step #12 Apply the Credit Against Applicable Taxes

12. Credit Application• The credit is refundable if no UBI tax liability

• Other info (per Notice 2010-82):

– Household employer eligible

– Multiemployer plan eligible (indirect premium pmt.)

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Payroll Taxes Defined for Health Care Credit

• Federal individual income tax withholding plus the employer and employee share of the 1.45% Medicare tax

• The employer and employee share of the 6.2% of OASDI social security tax are not measured in the limitation of the credit

• Taxes that are required to be withheld

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Healthcare Credit Resources

Resources

• IRS Notice 2010-44• IRS Notice 2010-82• FAQ’s on IRS website • IRS Form 8941 and Instructions

– Tax-exempts claim the credit calculated on Form 8941 on line 44f of Form 990-T

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Other Information Reported on Form 990-T

• Organization name, mailing address, phone number and name of individual charged with the care of the books

• Book value of assets as of fiscal year end

• Signer, typically an officer of the board or the senior minister

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Questions

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Thank you!

Amy Hendley, CPAahendley@larsonallen.com612-397-3067

Follow our blog for current

discussions on health care.

www.larsonallen.com/blog

www.twitter.com/larsonallen

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