With the signing of the two landmark bills comes sweeping changes to healthcare in the United States.
The Patient Protection and Affordable Care Act (H.R. 3590), and its reconciliation bill, Health Care and Education Tax Credits Reconciliation Act of 2010 (H.R. 4872), were both signed into law by President Obama in late March.
To assist our not-for-profit clients, RubinBrown is emphasizing portions of our summary and adding additional information related to key provisions that will be of interest to the not-for-profit sector.
Large Not-For-Profit Requirements & Penalties
Employers are not required by this legislation to provide health coverage, but “applicable large employers” that do not will be liable for an additional tax beginning in 2014.
An employer is an "applicable large employer" with respect to any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year.
The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000, or simply put approximately $167 per month.
The penalty would apply to employers with 50 or more workers but the first 30 workers would be excluded from the payment calculation. Organizations with fewer than 50 employees would be exempt from any employer responsibility.
Small Not-For-Profit Tax Credits
From 2010-2013, eligible Not-For-Profit employers (fewer than 25 employees and average annual wages are $50,000 or less) may qualify for a tax credit of up to 25 percent of their contribution toward employees’ health insurance premium. However, the amount of the credit is limited to the federal income tax withholding and the employer and employee Medicare tax, and the credit is subject to certain phase-outs.
In 2014 and beyond, eligible employers may qualify for a credit for two years of up to 50 percent of their contribution.
Tax exempt employers are eligible for this credit.
In summary, for small not-for-profits:
- If you have fewer than 50 workers, you will not face any penalties if you don’t offer health insurance.
- If you have 25 or fewer employees, you can qualify for a tax credit if the average wage is $50,000 and less. This credit is available in 2010. Your tax credit may be up to 25 percent of the cost of premiums. The tax credits will increase to 50 percent in 2014. However, it should be noted that for tax-exempt employers, the amount of the credit cannot exceed the total amount of income tax and Medicare tax withheld from employees’ wages for the year AND the employer share of Medicare tax on employees’ wages for the year.
There is a credit phase-out clause in the bill. The credit phases out gradually for eligible small employers if the number of full-time employees exceeds 10 or if the average annual wages exceed $25,000.
Payroll Tax Holiday & Credit
Not-for-profit organizations should also be aware of a provision in the newly passed HIRE Act (Hiring Incentives to Restore Employment Act).
A provision of this bill eliminates the employer portion of social security (but not Medicare) taxes on wages paid to employees hired between February 4, 2010 and December 31, 2010 if the newly hired workers were formerly unemployed (employee did not work 40 hours during the last 60 days).
The new employee cannot be a replacement unless the replaced employee "separated from employment voluntarily or for cause."
As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on the payroll for a continuous 52 weeks, the employer is eligible for an additional (only applicable to a not-for profit if it has unrelated business income) non-refundable income tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on its 2011 return.
To be eligible for the income tax credit, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. It should be noted that the $1,000 income tax credit will only benefit not-for-profit entities that are subject to the unrelated business income tax, but the payroll tax credit can be utilized by any not-for-profit.
Health Insurance Exchanges
Another provision that may be of interest to not-for-profits is health insurance exchanges. This provision provides a mechanism for individuals and employers to buy lower-cost health insurance as a part of purchasing pool.
All employers with fewer than 100 employees and individuals with incomes between 133% and 400% ($24,352 – $73,240) of federal poverty level will be eligible to participate in the exchanges once they are operational.
States are permitted to allow employers with more than 100 employees access to the exchanges after 2017. The law anticipates that the exchanges will be operational by January 1, 2014.
Effective for the December 31, 2011 year, the bill requires employer W-2 reporting of the value of health benefits (applies to W-2s to be issued in January 2012).
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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