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Friday, July 2, 2010

Small Tax-Exempt Organizations Can Benefit from ACA

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act. The new law gives small tax-exempt organizations that provide health care coverage to their employees eligibility for a refundable federal tax credit beginning with their 2010 Form 990.


In order to qualify for the credit, the employer must, for the tax year,:

  • Have fewer than 25 full time equivalent employees (FTEs);
  • Average annual wages of its employees less than $50,000 per FTE;and
  • Pay the premiums under a "qualifying arrangement." Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage of the premium cost of coverage.

For example, in 2010 a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health care premiums for these employees and otherwise meets the requirements of the credit. As stated in number three above, employer pays the premiums equal to a uniform percentage of the premium cost of coverage. The total amount of the employer’s income tax and Medicare tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2010.

The credit is calculated as the lesser of the following.

  • Initial amount of credit determined before any reduction (25% x $80,000) = $20,000
  • Employer’s withholding and Medicare taxes $30,000

Because the initial amount of credit is determined to be $20,000 and the employer’s withholding and Medicare taxes are greater than the credit, the 2010 tax credit would be $20,000. This credit is in the form of a refund to the exempt organization.

The maximum credit for 2010 for tax-exempt employers is 25% of the employer’s premium expenses. However, the amount cannot exceed the total amount of income and Medicare tax the employer is required to withhold from employees’ wages for the year and the employer’s share of Medicare tax on employees’ wages.

The Calculations

FTEs are an important part of the credit equation and therefore must be calculated accurately to ensure qualification for the credit. The method below demonstrates the calculation formula; however, for more specifics, it’s best to consult with your tax advisor.

To calculate the number of FTEs, divide total hours for which the employer pays wages to employees during the year by 2,080. (If the result is not a whole number, round to the next lowest whole number.) Average annual wages need to be less than $50,000 per FTE. To calculate the average annual wages, divide the total wages paid by the employer to employees during the employer’s tax year by the number of employer’s FTEs for the year. (Round the result down the nearest $1,000.)

Next Steps

Eligibility for the tax credit is the first step. Determining eligibility can be a complicated matter and it is recommended that you involve your tax advisor in this step. It is important to note, since exempt organizations do not have taxable income, the benefit of a refundable tax credit can have a positive impact from a financial standpoint.


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