Sanford Levings

"Hi, I’m Sanford Levings, President of MinistryCFO and author of this blog. The purpose of our blog is to share with you information and insights that we gather from working with and listening to our clients and partners, located throughout the country." read more

Save with Church Health Insurance Tax Credit

This is Free Money to Your Church!

free money picOne of the main provisions from the Patient Protection & Affordable Care Act (a,k.a., Obamacare) that is having a significant impact upon churches is the tax credit for health care cost.

What is a tax credit?  A tax credit is a sum deducted from the total amount a taxpayer owes to the federal government. In other words, churches can get a refund on a significant portion of their payroll taxes. This refund is a free return of cash from the IRS. In order to qualify for the tax credit, churches must meet the following requirements:

  1. The Church must have fewer than 25 full-time equivalent (FTE’s) employees. For example: two part-time employees working 1,000 hours each year = one FTE.

  2. The average annual wages of all FTE’s must be less than $50,000. Please note: In the computation of average annual wages, Pastors (who are ordained, licensed, or commissioned) are taken into account for the number of employees, but are not taken into account with respect to the average salary of employees (1).

  3. The medical insurance premiums paid for all full-time employees must be under a qualified arrangement. A qualified arrangement means that the church must pay at least 50% or more to a healthcare provider or insurance plan, which can include church welfare benefit plans and denominational insurance plans. These premium payments must be paid directly to the insurance company and not to the employee.

How much is the tax credit?  For the years 2010-2013, the credit for qualified tax-exempt organizations will be up to 25% of the cost of insurance. Starting in 2014, the credit maximum will increase to 35% (2)  NOTE:  HRA, HSFA, and HSA employer contributions are not taken into account as part of the cost of insurance. Here’s a hypothetical example: Suppose ABC church has the following: 

  1. Seven full-time employees. Two of the seven are Pastors making $75,000 each.  The wage average of the other 5 employees = $40,000.

  2. Four part-time employees make for two FTE’s, and the average annual wages of these four part-time employees = $10,000.

  3. All seven full-time employees are offered 100% health care coverage under a qualified arrangement. Six of the seven employees accept these benefits.

  4. Health insurance cost for the six full-time employees totals $60,000 for the calendar and fiscal year 2012.

Computation of tax credit: ABC Church qualifies for a $15,000 refund from the IRS computed as follows: $60,000 x 25% = $15,000. ————————————————————————————————————- (1)   A minister who is considered a common law employee is counted in determining the number of FTEs, and premiums paid on his or her behalf are taken into account in computing the credit. However, compensation paid to a minister for performing ministerial services is subject to self-employment taxes rather than FICA taxes. Therefore, a minister does not have wages as defined under IRC Sec. 3121(a) for computing an employer's average annual FTE wages.  The church will need to indicate if the minister was issued a W-2 or a 1099-Misc. (2)   The amount of the credit cannot exceed the total amount of income and Medicare tax the employer is required to withhold from employees' wages for the year plus the employer's share of Medicare tax on the employees' wages. ————————————————————————————————————- Action Steps: 1)    Pull your payroll report. 2)    Pull latest month of checks paid to health insurance companies and/or paid to employee(s) for insurance reimbursement. 3)    Gather current employee count. 4)    Send this information to MinistryCFO! ————————————————————————————————————- MinistryCFO finds ways to save your money.  Let the MinistryCFO team prepare your annual health insurance health care tax credit tax return.   And if you don’t qualify, let the MinistryCFO team help you get qualified so that you can take advantage of these savings.  

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