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Focus on Not-For-Profits: Health Insurance Premium Credits

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The IRS recently announced the process for small not-for-profit entities to claim a tax credit for the health insurance premiums you pay on your employees.
December 15, 2010

The IRS recently announced the process for small not-for-profit entities to claim a tax credit for the health insurance premiums you pay on your employees.

As communicated in previous issues of RubinBrown’s E-Focus, the healthcare reform legislation passed by Congress in March includes a provision that grants qualified small employers, including not-for-profit entities, with a credit if they pay health insurance premiums for their employees.

Effective for tax years beginning after December 31, 2009, an eligible small employer (ESE) may claim a tax credit for non-elective contributions to purchase health insurance for its employees.

An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the credit is reduced for any employer with more than 10 FTEs and whose employees have average annual full-time equivalent wages of more than $25,000.

To qualify for the credit, the ESE must pay at least 50 percent of each employee’s premium for a qualifying health insurance plan. The percentage paid for each employee must be the same.

For a not-for-profit entity, the credit is equal to 25 percent of the premiums paid by the ESE (25 percent of the average premium for the small group market in the state if this is less). The 25 percent amount increases to 35 percent for years beginning after December 31, 2013.

In addition, a not-for-profit ESE cannot take a credit for more than the income and Medicare tax withheld from employees increased by the employer’s share of Medicare Tax.

Tax-exempt organizations will compute the small business health care tax credit on newly created Form 8941 and will claim the credit on a revised Form 990-T (Exempt Organization Business Income Tax Return), which is used by tax-exempts to report and pay the tax on unrelated business income.

The IRS says Form 990-T will be revised for the 2011 filing season to enable eligible tax-exempt organizations, even those that owe no tax on unrelated business income, to claim this tax credit.

A draft of Form 8941 is now available, but no instructions have yet been issued. IRS says the final version of Form 8941 and its instructions will be available later this year.


Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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