In March 2010, the Affordable Care Act was enacted to encourage small businesses and tax-exempt organizations to offer health insurance to their employees for the first time or continue the health care coverage they already provided.
The Act gave eligible nonprofits the opportunity to receive a Small Employer Health Care Tax Credit for premiums paid to provide health insurance to their employees. For tax years 2010 through 2013, the maximum allowable credit for nonprofits was 25% of premiums paid. For tax year 2014, the maximum allowable credit increased to 35% of premiums paid. The good news for eligible nonprofits is that the credit is refundable, meaning that even if the organization has no taxable income, they still may be eligible to receive the credit as a refund.
Small Employer Health Care Tax Credit
Eligibility is limited to those nonprofits that meet the following criteria:
- Pay at least 50% of employee-only health care insurance costs for their employees.
- Employ fewer than 25 full-time equivalent (FTE) employees. Generally, all employees who perform services are considered employees; however, special rules apply to leased employees, seasonal employees who work fewer than 120 days, and ministers.
- Average employee wages are less than $50,000. Wages, for this purpose, are defined as wages subject to Social Security and Medicare tax withholding without considering any wage base limit.
- Purchased health care insurance through the SHOP Marketplace, unless an exception was granted (applicable for tax years after 2013).
Eligible nonprofits can claim a credit for the years 2010 through 2013 and for any two years after that. The amount of the credit is determined by completing IRS Form 8941. Once the amount is calculated it is claimed on line 44f of IRS Form 990-T, even if the organization has no unrelated trade or business income.
The credit phases out gradually for organizations with average wages between $25,000 and $50,000, and for organizations with the equivalent of between 10 and 25 full-time employees.
A common question is “What if my nonprofit is eligible for the credit but failed to claim it in prior years?” To change a previously filed return, write “Amended Return” at the top of the Form 990-T. Also, include a statement that indicates the line numbers on the original return that were changed and provide the reason for each change. In this case, Form 8941 should also be included. Generally, the amended return must be filed within 3 years after the date the original return was due or 3 years after the date the organization filed it, whichever is later.
For more information about the Small Business Health Care Tax Credit, including detailed guidance, instructions for Form 8941, and answers to frequently asked questions, visit the IRS website.