Health Insurance Credit Can Benefit Churches
Churches with multiple, full-time staff employees have a great opportunity to recover up to 25 percent of the cost of health insurance. The Health Insurance Credit is part of the Affordable Care Act and is designed to help small business and small tax-exempt organizations.
An application from each individual church seeking this tax credit must be filled out. If a church qualifies, the church will receive part of their tax withholdings sent into the government based on their employees’ wages.
To qualify for the tax credit, the church must meet the following three requirements:
- Employ fewer than 25 “full-time equivalent” employees (FTE);
- The average annual wages of its employees for the year is less than $50,000 per FTE (treatment of clergy is very unique – read below);
- The church pays premiums for health insurance coverage under a “qualifying arrangement.”
Clergy are treated in a very interesting way for the Health Insurance Credit. Clergy are considered employees and are counted toward the total of FTEs if the clergy person is full-time. However, since ministers are not subject to FICA taxes and incoming tax withholding, their wages are not included in calculating the average annual wages. This will make it more likely for some churches to quality for the credit since the generally higher wages paid to clergy are removed from consideration.
For example, a church has four non-clergy, full-time employees with salaries of $40,000, $50,000, $60,000, and $70,000. The church also has a full-time clergy paid $100,000 in compensation. The pastor is counted as a FTE, so the church has 5 FTEs. However, the pastor’s salary is not included in calculating the average annual wages. Therefore, the church’s average annual compensation is only $44,000, and the church qualifies under requirements 1 and 2.
I know, this sounds strange. Remember, this is a tax credit. Clergy do not have taxes withheld, therefore, clergy compensation is not figured into the calculation.
Many of our churches will qualify under the first two requirements. However, many churches will fail the third requirement – the church pays premiums for health insurance coverage under a “qualifying arrangement.”
To qualify, the church must be paying for health insurance coverage for its employees. Church contributions to health reimbursement arrangements (HRAs), health flexible spending arrangements (FSAs), and health savings accounts (HSAs) do not count for the purposes of the small business health care tax credit. Only the money paid for health insurance coverage is counted.
The church does not have to pay the total cost. If the church pays only a portion of the premium under the arrangement, and the employee pays the rest, then the amount of premiums counted in calculating the credit is only the portion that the churchy has paid.
To apply for the Health Insurance Credit the church must fill out Form 8941and Form 990-T. The application process is a bit cumbersome; however, it may be well worth the church’s time and energy to work through the process. It is also advisable to contact the church’s auditor (if the church has an outside auditor) or another CPA in their area to assist in the application.
If your church has full-time employees besides your pastors, and the church pays for all or part of their health insurance premiums, then church may receive up to 25 percent of those premiums back. Check out www.irs.gov
and search for “Small Business Health Insurance Tax Credit” for more information.