INDUSTRY INSIGHTS | FALL 2011 EFFECT

Nonprofit Tax Credit Could Help Reduce Your Health Care Costs

by Randy Sylvan

It is three o’clock in the morning, and I am trying to sleep on the floor in the Denver airport, using my laptop bag as a pillow, listening to the sounds of vacuum cleaners humming around me and the frequent announcements over the loud speaker. Lousy weather grounded my plane, and all the local hotel rooms are booked. I am not able to fall asleep, so oddly, I find myself thinking about a health care credit that really can benefit smaller eligible nonprofits.

In March of 2010, as part of the health reform legislation, Congress authorized a tax credit for small nonprofit employers: 25 percent off the health insurance premiums paid in 2010, subject to many rules and limitations.

Since the credit was introduced, very few of my clients have taken advantage of it. As I sit here watching all the people around me trying to sleep, I can’t help but wonder why. Is it because they don’t know about it? Is it because it has so many complex rules and limitations? Perhaps it’s both. I recently spoke to a group of nonprofit organizations on this topic and discovered there was a lot of confusion. So, for those who are unaware of the credit, let me review the eligibility, and for those that find it dauntingly complex, perhaps I can break it down.

The first eligible year for the credit is the calendar year ending December 31, 2010, and for fiscal years ending in 2011. The credit is a percentage of the health insurance costs the organization pays on behalf of its employees. For tax years beginning in 2010 through 2013, the credit is 25 percent and rises to 35 percent for 2014 through 2015. The good news is that the credit can offset any of your unrelated business income tax (UBIT), or if you don’t have any unrelated business tax due, the credit is refundable—that means you are not getting your own money back, the refund is actually paid by the government. This is essentially free money.

Organizations must meet several basic provisions to qualify for the credit.

• The organization must have a qualified health plan.
• Your entity must have 25 or fewer full-time equivalents, based on actual hours worked with a 2080 hour maximum.
• The average annual wages must be less than $50,000 per each full-time equivalent.

Full-time equivalents include those who did not utilize health insurance benefits, those who were no longer employees at year-end, and union employees. You can exclude leased employees and seasonal employees (those who worked 120 days or fewer).

There are several limitations on claiming the credit, including separate state ceilings on premiums paid and an overall cap based on the payroll taxes paid by the organization. Also only non-elective premiums qualify, so it does not apply to life, disability, or long-term care insurance.

In order to claim the credit, follow the detailed instructions of Form 8941 and attach it to IRS Form 990-T (which is also the form to report any unrelated business income in excess of $1,000). Form 8941 requires eight separate calculations, and there are other limitations to claiming the credit and on the amount of the credit. Smaller nonprofits may not have the resources to make these calculations. If your organization does qualify, you need to file a 990-T to claim the credit, even if you don’t have any unrelated business income.

To determine if you qualify for the credit, you should:

• Gather the information needed to make the eligibility and credit calculations.
• Put together your list of employees by name, title, hours worked, annual salary, and premiums paid for health insurance.
• Calculate the estimated credit.
• Discuss tax planning ideas before year-end that may allow your organization to increase the amount of credit it may be eligible for.

For 2010, if your organization has a fiscal year-end, there is still some planning that could potentially be done prior to the preparation of your 2010 990 and 990-T, before the 2011 due date. The tax return can be amended at any time during the statute of limitations period to claim the credit, since there is no requirement that the credit be claimed on the original return, or by the extended due date, or some other special date.

This tax opportunity could be a windfall to nonprofits that tend to spend a lot of their limited resources on benefits. It could be an unexpected gift—like hearing the announcement that not only will your 6 a.m. flight leave on time but there will be coffee on your flight. Actually, for those who take advantage of this little gift, the savings could be thousands of dollars.