Credit for Small Employer Health Insurance Premiums Available for Tax-Exempt Entities

Beginning in 2010, certain small employers can claim a credit for health insurance premiums paid.  If a taxpayer qualifies, the credit can be used to reduce any federal income tax owed.  A tax-exempt organization can also qualify for the credit.  In the case of a tax-exempt organization, no tax is owed; therefore, the tax cannot be reduced.  Instead, a tax-exempt organization can be issued a cash refund.

A taxpayer calculates the credit on Federal Form 8941.  For tax-exempt small employers, the credit is generally 25% of premiums paid, and is limited to the amount of certain payroll taxes paid.  A tax-exempt entity then transfers the credit to Form 990-T (Exempt Organization Business Income Tax Return) to claim the refund.   If an organization was eligible for the credit in the past, a refund claim can be made for any open tax years (generally three years). 

In general to qualify for the credit, an organization must meet three requirements:

• The organization must have paid premiums for employee health insurance coverage under a qualifying arrangement.  A qualifying arrangement is generally an arrangement that requires you to pay a uniform percentage (not less than 50%) of the premium cost for each enrolled employee’s health insurance coverage.
• The organization must have fewer than 25 full-time equivalent employees.
• The organization must have paid an average annual wage for the tax year of less than $50,000 per full-time equivalent employee.

If you work for or are associated with a tax-exempt small employer and would like more information, please contact the tax professionals at Schneider Downs.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.