Healthcare Penalty or Credit?

By Raul Rivera

It has been nearly 5 years since President Obama signed the Affordable Care Act (ACA) into law. As time goes by, we are learning more and more about the ACA and how it affects churches and pastors. Perhaps the most contentious provision of the ACA requires that all “applicable individuals” maintain “minimum essential” health care coverage or pay a penalty. This provision took effect beginning in 2014. Because of this, IRS Commissioner John Koskinen announced this tax season to be one of the most complicated, partly due to the fact that this is the first year the ACA will appear on your tax form.

The date that matters

Now that the requirement to be covered is in full effect, failure to maintain minimum essential health care coverage will result in a penalty, which is also known as a “shared responsibility payment”. In essence, there are 3 main types of minimum essential coverage:

1.     Employer-sponsored coverage;

2.     Individual health coverage; and

3.     Coverage under government-sponsored programs.

For the months in which you failed to maintain minimum essential coverage in 2014, the penalty will either be $95 or 1% of income in 2014, whichever is greater. The penalty in 2015 increases to either $325 or 2% of income, and in 2016 the penalty increases to either $695 or 2.5% of income.

This penalty applies to any period an individual does not maintain minimum essential health care coverage. The penalty is assessed monthly, which is determined through the tax code, and regarded as an additional amount of federal tax owed. There is, however, some good news. If you have not yet obtained minimum essential health care coverage, you have until February 15, 2015 to enroll in a health care plan in order to not be penalized for the 2015 tax year. In some instances, individuals are granted coverage exemptions, in which case Form 8965 would need to be attached to their income tax return via Form 1040. If a coverage exemption does not apply to you, then you would need to use the Shared Responsibility Payment Worksheet to determine your shared responsibility payment.

Unfortunately, if there was anytime at all during 2014 in which you did not have health coverage then you will be subject to a penalty, or shared responsibility payment, for the period in which you were not covered. However, you still have time to meet the deadline for 2015.

Solution for both pastor and church

Everyday we receive phone calls and emails from pastors and church leaders, just like you, with questions about the Affordable Care Act. Many churches want to know if there is anything, within the law, that they can do to keep costs down and still help their pastors and staff receive good health care coverage. Below are 2 options that you and your church can choose from to help keep health care costs down and to also reduce taxes for the pastor and staff.

Most churches will not have to provide a group health care plan, because they usually employ less than 50 staff. If your church chooses to provide a group insurance plan then it must be a plan that meets the requirements of a qualified health plan.  Additionally, if you provide health coverage for your employees, you may qualify for the Small Business Health Care Tax Credit. This credit is available to small churches and other employers that provide group health care for their staff.  This credit is only available to employers who enroll in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace. While each situation is different, there are a few conditions to consider in order to qualify for the tax credit.

a) Number of employees: If you have 25 full-time equivalent employees or more, you are not eligible for the Small Business Health Care Tax Credit. If your church uses part-time workers, you may still qualify for the Small Business Health Care Tax Credit even if you employ more than 25 individuals.

b) Average wages of employees: Will the annual average wages of your employees be less than $51,600 in 2015? The maximum tax credit will go to smaller employers (those with 10 or fewer full-time employees) paying annual average wages of $25,800 or less. The Small Business Health Care Tax Credit is completely phased out for employers with 25 full-time employees or paying annual average wages of $51,600 or more.

c) Employer-paid insurance premiums: Beginning in 2014, small businesses were required to pay 50% of premiums for single health insurance coverage in order to be eligible for the tax credit. However, eligible tax-exempt organizations are only required to pay at least 35% of premiums for single health insurance coverage.

Now, if your church meets these requirements for the Small Business Health Care Tax Credit then as a tax-exempt organization you will need to use Form 8941 to figure the refundable credit, then claim the credit on Line 44f of Form 990-T. If you would like to take advantage of this credit, feel free to call our office; we will be very happy to assist you.  Next, let us look at the 2nd option that will allow you to provide affordable health care to your pastor and staff. 

By letting the pastor and staff member(s) obtain their own health care coverage in the Marketplace via healthcare.gov, or through any other method, it will save the church and the pastor or staff member a ton of money. According to Technical Release No. 2013-03, if someone receives insurance through his/her employer (the church), then he/she is not eligible for the insurance premium subsidy. In other words, under the ACA most people will qualify to receive tax relief/return based upon their income and family size.

Let us look at an example to help put this into perspective.

Example of Pastor X and his health care credit

ABC Church wants to pay for Pastor X’s health insurance. Pastor X is married, with three children. ABC Church has been paying Pastor X a total salary package of $40,000.00. The Affordable Care Act requires Pastor X to obtain minimum essential coverage. After visiting the Marketplace at healthcare.gov, Pastor X will have to pay $10,493.00 in health insurance premiums under a “silver plan”. According to the subsidy calculator, he will qualify for a subsidy of $9,008.00 when he files his tax return, and he will receive a refund of $9,008.00, making his total out-of-pocket health insurance costs for him and his family $1,485.00. At that point, the church board can approve to give Pastor X a raise of $1,485.00 to cover the out-of-pocket difference.

Had the church chosen to cover his insurance under an employer-provided health insurance plan or a medical reimbursement plan, the pastor would not qualify for the income tax refund subsidy and the total costs to the church would have been $10,493.00.  If making the monthly premium proves difficult for Pastor X, he can apply for an advanced premium tax credit, which lets Pastor X “choose how much advance credit payments to apply to his premiums each month, up to a maximum amount (healthcare.gov).”  Let me explain.

The advanced premium tax credit reduces marketplace enrollees’ monthly payments for insurance plans purchased through the Marketplace. Those who are eligible can receive their tax credit at the time of purchase and choose how much advance credit payments to apply toward their monthly premiums.

If the enrollee chooses the advance payment option, then the IRS will pay insurers directly such that the cost of the premium is reduced upfront. With this option, the enrollee would need to reconcile his/her premium tax credit at tax time the following year. Keep in mind that if you get a raise or make more money than you anticipate, you may have to pay back some of the advanced premium tax credits.  So to be safe, it may be a good idea to carefully calculate the credits and still review them a few times a year to ensure that the credit you receive is commensurate with your income.

We can help!

Trust me when I say that I understand how overwhelming it can be to be a pastor of a church, serving God’s people, while also trying to comprehend all of the legal requirements of the church today. That is what still keeps me up late at night; sifting, digging, and researching through all of the changes taking place in today’s legal landscape so that we, here at StartCHURCH, can continually serve you and your ministry well. I want to encourage you to take advantage of our Minister’s Tax Service in which our staff and CPA’s will work with you hand-in-hand to ensure that your personal income taxes are done correctly, or I encourage you to simply join us at one of our Ultimate Church Structure Conferences where we will empower you with strategic knowledge to help you navigate your church in the 21st century.

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