New health care reform law creates a tax credit for congregations

Most eligible churches, synagogues, and related organizations have already missed out on an new tax credit in the 2010 tax year, but should prepare to take advantage of it for the current year.

The new credit, which will refund up to 25% of the cost of health insurance premiums paid by the congregation, is part of the Affordable Care Act of 2010, the health care reform law signed by President Obama last March. The credit applies to all employers equally, but nonprofits and congregations are especially likely to miss out because they do not follow tax-law changes closely. This credit is refundable, even to a congregation that normally does not file a corporate income-tax return.

To be eligible, an employer must:

  1. Have fewer than 25 employees, including part-time employees counted as Full-Time Equivalents (FTE). Clergy who are “common-law employees,” as most are, are included in this count.
  2. Pay an average of less than $50,000 per FTE employee. Clergy who pay self-employment tax and are exempt from withholding, as most are, apparently do NOT count in calculating the average compensation. Strange, but (evidently) true.
  3. Pay premiums for health insurance coverage under a “qualifying arrangement.” The rules for qualifying are a bit complex, and phase in gradually; ultimately in order to qualify for the credit, an employer will need to pay half of the premium for all employees included in its health insurance benefit.

Nonprofit employers can calculate the credit on Form 8941, and claim it on Form 990-T, line 44f. Congregations do not normally file Form 990-T, so they should write “Request for 45R Credit Only” across the top.

All of this information comes to me from Richard Hammar, the most thorough and reliable provider of up-to-the minute legal and tax information for ministers and churches, and his newsletter “Church Law and Tax Report.”