Health Care Reform and the Health Insurance Tax Credit
by Mark Helland

Mark Helland, CPA is a partner with the public accounting firm of Elliott, Dozier and Helland, PC which is located in Tulsa, Oklahoma. Mark specializes in audit and tax related issues for church and ministry clients across the United States. For further assistance from Mark on this topic or for assistance on any other tax, accounting or church audit and compliance need, Mark can be contacted via email at [email protected] or by phone at (888) 893-1259 or (918) 488-0880.

After months of partisan debate, the “Patient Protection and Affordable Care Act” became law nearly two years ago, on March 24, 2010. This act is widely considered to be the most significant piece of medical insurance reform legislation in the past thirty years. Known generally as “health care reform” or “Obama Care” it is also highly complex and controversial, with major implications for the U.S. economy.

There is a lot of misinformation in the public domain as to what exactly is contained within the health reform act, so it is important to understand that the act does not directly provide for a government takeover of health care as seen in Canada or Great Britain. The intent of the act was to expand health insurance coverage to more Americans with the goal being that 95% of Americans will be covered. What makes the act so controversial are the logistics of how this will be accomplished. The provisions of the act will be phased in over nearly ten years so certain components are years away from going into effect while other components are already in effect. Since the provisions of the act go into effect in stages, I believe the easiest way to understand the major provisions of the act is to break them down chronologically. Following are some of the major provisions which will affect churches and ministries in the coming years:

Provisions which took effect in 2010:
More than a dozen features of the act have already taken effect, including:

1. Tax credits are available for small businesses that provide health insurance to employees. Even tax-exempt employers, such as churches or ministries can potentially qualify for these credits as well. A tax-exempt employer claims the refundable credit by filing a Form 990-T with an attached Form 8941 showing the calculation of the claimed credit. The amount of the credit cannot exceed the total amount of income and/or Medicare taxes the employer is required to withhold from employee wages for the year and the employer’s share of Medicare tax on employee wages for the year. This could be a tremendous benefit to churches that qualify.

2. Dependent children are now allowed to remain on their parents’ health insurance plans until age twenty-seven.

3. There is now a ban on health insurers setting lifetime maximum benefit limits on medical coverage.

4. Health insurers can no longer set pre-existing conditions limitations for children. However, insurers can still deny coverage altogether for individual coverage for children until 2014.

5. “High-risk insured pools” are to be established which would be open to applicants with medical problems already rejected by insurers.

Provisions taking effect in 2012 through 2013:

1. Effective for the 2012 tax year, employers are required to report the value of health insurance coverage provided to employees on each employee’s annual Form W-2. This reporting is for informational purposes only and does not affect tax liability, as the value of employer provided health insurance coverage continues to be excludible from an employee’s income. The ultimate intent of the W-2 reporting will be to track coverage values for the 40% excise tax on high cost/”Cadillac” medical plans which will begin in 2018. The medical coverage costs subject to this reporting include; medical plans, prescription drug plans, dental and vision plans and employee assistance plans, among others.

2. Tax laws will change in 2013 to help pay for the cost of the health reform act. Taxpayers will see the 7.5% of adjusted gross income floor on itemized deductions for medical expenses rise to 10% and “high-income households” will see their Medicare taxes increase. Individuals who earn more than $200,000 in wages and joint filers who earn more than $250,000 will pay an additional .9% in Medicare taxes. Additionally, a new 3.8% Medicare tax will apply to the unearned or investment income of “high income households”.

Provisions taking effect in 2014:

The year 2014 is the key implementation year for the most significant of the health insurance requirements in the act. The U.S. government will require most Americans to have health insurance in force by 2014. While the constitutionality of this portion on the act is being challenged by multiple states in the court system, at this point in time this is the law of the land. The provisions pertaining to employers are very complex and will require the help of a good health insurance agent to navigate all of the intricacies. As a broad overview, the key components of the health insurance requirement are as follows;

1. Health Insurance Exchanges – By no later than 2014, individual states must establish insurance exchanges through which small businesses/organizations will be able to pool together to buy insurance. If individual states do not comply, a federally operated exchange will be set up. Under the act, the term “small businesses/organizations” means those having no more than one hundred employees. However, beginning in 2017 even large employers may enter the exchanges. Policies offered through the exchanges would be required to cover a range of basic benefits and insurance companies participating in the exchanges may not deny coverage to anyone with a pre-existing condition. The purpose of the exchanges is to serve as a health insurance resource for individuals who are in transition between employment and self-employment or for small businesses who would otherwise lack a large enough base of employees to qualify for more favorable group health insurance rates.

2. Employer Mandate – Certain employers will be required to offer health insurance to employees or be subject to a penalty. Employers with more than fifty employees must provide them with qualified health coverage or pay a $2,000 penalty per employee. Those employers with less than fifty employees are not required to provide coverage, but it is important to note that the employees of such organizations would then be required to buy individual policies or be subject to individual penalty.

3. Penalties for Uninsured Americans – Under the act, individual Americans who are not covered by an employer plan and who fail to purchase health insurance are subject to an annual penalty of at least $95 or up to 1% of income, whichever is greater, with a cap of $695 per year.

Finally, in 2018 a 40% excise tax will apply to employers who offer high cost/“Cadillac” plans. The definition of such plans would be those health insurance policies with an annual cost of greater than the threshold amount of $10,200 for an individual plan and $27,500 for family coverage. The logic here is that employees who are provided with such all inclusive coverage tend to use health care services at a much greater rate than others with less generous policies.

Health Insurance Tax Credit:

For churches and ministries, I believe that the most intriguing (and unbelievable) aspect of the health care reform act/”Obama Care” is the tax credit for health insurance. Because churches and ministries are tax-exempt, it would seem that a tax credit would not be possible because there is no income tax paid to be offset by a credit. In other words, most credits are considered to be “non-refundable” credits as they must offset income taxes paid to be of any benefit. However, the health insurance tax credit is considered to be a “refundable” credit which does not have to offset income taxes paid, and even tax-exempt employers such as churches or ministries can potentially qualify for this credit. Amazingly, the health care reform act has provided for non-profit organizations to qualify for the health insurance credit as long as the organization has paid certain levels of employer matching contributions of Medicare tax. Following is a very condensed summary of the basic qualifications to qualify for the health insurance tax credit:

Your church or ministry organization must offer health insurance benefits to employees and must meet certain discrimination tests to ensure that health insurance coverage is not being “selectively” offered.
The organization must pay at least 50% of the cost of this coverage.
Next, there are two complicated calculations to determine the number of full-time equivalent employees (FTE’s) that your organization employs and the “average annual wages” of these employees.

Clearly, large churches and ministries will not qualify for this credit, but smaller churches and ministries need to consider whether or not they may be able to qualify. From our firm’s early assessment of the health care insurance credit, we believe that this credit could be a tremendous benefit to churches that qualify. For example, we recently worked with a mid-sized church that was able to qualify for a $22,000 tax credit for the year ended December 31, 2010. I would provide a strong word of caution though that this is not a DIY (“do it yourself”) project. The rules for this credit are complex and professional advice is an absolute necessity to correctly determine both eligibility for the credit and to accurately calculate the amount of the credit to which your organization may be entitled.

This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is shared with the understanding that neither the author nor Tony Cooke Ministries is engaged in rendering legal, accounting, psychological, medical or other professional services. Laws and regulations are continually changing, and can vary according to location and time. No representation is made that the information herein is applicable for all locations and times. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Health Care Reform and the Health Insurance Tax Credit by Mark Helland

Health Care Reform and the Health Insurance Tax Credit
by Mark Helland

Connect with TCM

Search our Site

Recent Articles