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April 18, 2014 | 18th Nisan 5774
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Healthcare Reform Tax Credits for Synagogues

Qualified synagogues- those with 25 or fewer "full time equivalent" employees and average wages less than $50,000) may be eligible for the Tax Credit if they contribute a uniform percentage of at least 50% towards the cost of their employees' health insurance (there is a limited exception to this uniformity requirement for 2010).

(This information is intended to be educational and informational for synagogue leaders. The Union for Reform Judaism does not provide tax advice. We urge you to share the enclosed information with your legal and tax advisors.

In addition, the filing for this credit raises nuanced and complex church-state separation issues, which neither the URJ nor other arms of the Movement have had time to address fully. Does taking a tax credit constitute government funding of synagogues? Does setting up a system requiring, for the first time, synagogues to file a 990-T to receive benefits weaken our position opposing current Congressional efforts to require churches and synagogues to file the much longer, more complex and more intrusive full 990 forms from which we have always been exempt.  Indeed does it jeopardize a whole range of special exemptions and protections that we have? These issues are being analyzed along with an array of new church-state questions facing the Movement and the process along with our recommendations will not be completed before this year's deadline.  We ask each synagogue's leadership to read the material carefully and use its own judgment at this time. )

I. Introduction:

The Patient Protection and Affordable Care Act ("PPACA") established a Small Business Healthcare Tax Credit as an incentive for small employers (including religious institutions) to provide health insurance coverage to their employees. Qualified synagogues- those with 25 or fewer "full time equivalent" employees and average wages less than $50,000) may be eligible for the Tax Credit if they contribute a uniform percentage of at least 50% towards the cost of their employees' health insurance (there is a limited exception to this uniformity requirement for 2010).

For synagogues as well as all tax exempt organizations, the Tax Credit can be up to 25% of premiums paid and will take the form of a refundable credit against the amounts the synagogue is required to withhold from its employees' wages for Federal Income Taxes and Medicare Tax, plus the employer share of Medicare Taxes (the credit is therefore also limited to these amounts).

Please note: synagogue contributions to health reimbursement arrangements (HRAs), health savings accounts (HSAs), and health flexible spending accounts (FSAs) are not eligible premiums for purposes of computing the Tax Credit.


II.        How The Tax Credit Works

Synagogues with no more than 25 full time equivalent employees (FTEEs) and average employee wages of less than $50,000 are eligible for the Tax Credits if they offer "qualifying health care insurance coverage (from a licensed insurance company or a self-funded church plan) under a qualifying contribution arrangement" (defined below). The amount of the credit for synagogues in 2010 through 2013 is equal to the applicable percentage up to 25% of the lesser of the following two costs:

  1. Actual Costs: the total amount the synagogue contributes (not counting contributions of the employee) for qualified health insurance coverage, or
  2. Maximum Costs: the total amount the synagogue would have paid if each employee taken into account in (1) were covered by a policy with a premium equal to the average premium for the small group market in the state (as determined by the Department of Health and human Services (HHS) and published by the Internal Revenue Service (IRS) in Revenue Ruling 2010-12 (http://www.irs.gov/pub/irs-drop/rr-10-13.pdf). These premiums are also reprinted in the instructions to Form 8941 (http://www.irs.gove/pub/irs-pdf/i8941.pdf). This limits the value of the credit for higher cost plans.

As synagogues do not pay federal income taxes, it would apply the Tax Credit, up to 25% of the premium paid (subject to the maximum amount described above) as a refundable credit against certain payroll tax obligations such as withholding of the employee portions of Medicare Taxes and federal income taxes, as well as the synagogue's share of Medicare Tax obligations.

The Tax Credit is limited for a synagogue to the amount of its payroll obligations for all synagogue employees.

III.             Credit Prorated

The Tax Credit is prorated based on the number of employees and the average wages. The full amount of the Tax Credit is available to synagogues with 10 or fewer FTEEs and whose employees have average wages less than $25,000. The Tax Credit is phased out as the FTEE count and average wages increase. No tax credit is available to synagogues with more than 25 FTEEs or whose average wages exceed $50,000.

IV. Full time employees and Average Wages

Unless specifically excluded, all synagogue employees during the year for which the Tax Credit is being claimed are taken into account when computing the synagogue's FTEEs, annual average wages, and premiums paid - including former synagogue employees who terminated employment during the year and employees who do not enroll in the synagogue's health insurance plan (whether or not they are covered under another health insurance plan).

A synagogue calculates its number of FTEEs by dividing the total hours worked by all staff during the year by 2080. Synagogues may round down to the nearest whole number (not less than 1) of FTEEs, so 5.99 become 5. For all staff, the maximum number of hours that are counted for any one employee is 2080. IRS Notice 2010-82 (http://www.irs.gov/pub/irs-drop/n-10-82.pdf) and the corresponding FAQs (http://www.irs.gov/newsroom/article/0,,id=220839,00.html) state that synagogues may apply different methods of calculating employees' hours of service for different classifications of employees (counting actual hours, using a days-worked or a weeks-work equivalency, as long as the classifications are reasonable and consistently applied.

Wages, for the purpose of the Tax Credit, are those wages subject to Social Security payroll taxes (FICA). As discussed below, wages paid to clergy are excluded from this calculation as clergy wages are not subject to FICA. Synagogues calculate average wages by dividing the total wages paid to all staff (excluding wages paid to clergy) by the number of FTEEs (including FTEEs who are clergy), rounded down to the nearest $1000. Seasonal staff are only included when they have worked for 120 days or more in any one tax year (The premiums paid for seasonal staff are included in the total premium amount used for computing the credit).

V. Special Treatment of Clergy

Rabbis and Cantors are generally considered self-employed for Social Security (FICA) and Medicare Tax purposes. Depending on the situation, clergy may be considered employees for purposes of the Tax Credit.  A synagogue must determine whether its Rabbi(s) and/or Cantor(s) satisfy the requirements of the common law test for determining worker status. This is the same test that a synagogue follows to determine whether its Rabbi and/or Cantor is a synagogue employee subject to Form W-2 reporting or an independent contractor subject to Form 1099 Tax reporting. If the synagogue is already reporting the wages of its Rabbi(s) and/or Cantor(s) on a Form W-2, the Clergy in question are most likely employees for the purposes of the Tax Credit.

For more information on the common law test to determine worker status, go here: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

If the synagogue's clergy receive form 1099 annually for the purposes of tax reporting, and are treated as self-employed, he/she is not taken into account for the Tax Credit. If he/she is considered an employee, he/she is included in the synagogue's employee count and the health insurance premiums paid for the coverage of the clergy are counted towards the Tax Credit.

It is important to note that even when counted as an employee for the purposes of the Tax Credit, the Rabbi's and/or Cantor's compensation is excluded from the synagogue's calculation of average wages because it is not subject to FICA. Such exclusion may be advantageous to some synagogues resulting in a lower overall average wage.  The salaries of the Rabbi and/or Cantor are excluded from the calculation but the Rabbi and Cantor are included in the calculation of the number of FTEEs.

VI. Clergy Withholding

Regardless of the employment status of Rabbis and Cantors, synagogues do not pay Medicare Taxes on their behalf or withhold Medicare Taxes from their pay. Many synagogues do not withhold federal income tax from their compensation. The Tax Credit is limited to the aggregate amount of withholding of federal income and Medicare Taxes, plus the synagogue's portion of Medicare Taxes. In future years, Rabbis and Cantors may wish to voluntarily have the synagogue withhold federal income taxes from their compensation to increase the utility of the Tax Credit (Both the synagogue leadership and clergy should consult their tax advisors to determine the best course of action). Self-employment tax payments are not considered in terms of the Tax Credit.

 

VII. Qualifying Arrangement

The synagogue must make a non-elective contribution (not through a Health Savings Account or Health Flexible Savings account) on behalf of each employee who is enrolled in coverage that is not less than 50% of the premium cost of the qualifying health insurance coverage. The rules vary depending on, among other things, whether the synagogue offers a single health insurance plan or more than one plan, the insurer uses composite billing or list billing, or whether the synagogue offers a more expensive tier of coverage than single coverage.

IRS Notice 2010-82 (http://www.irs.gov/pub/irs-drop/n-10-82.pdf) and the relevant FAQs (http://irs.gov/newsrrom/article/0,,id+220839,00.html) provide many examples to illustrate how such rules are applied. A synagogue covering its Rabbi in one plan and its other staff in another qualifying arrangement, may qualify for the Tax Credit if the synagogue makes uniform contributions.

The requirement applies to the premium for single (employee-only) coverage. If a synagogue employee is receiving coverage that is more expensive than single coverage (family) the synagogue need only pay at least 50% of the premium for single coverage for that staff member (even if it is less than 50% of the premium for the coverage the employee is actually receiving). The synagogue's contribution must also be a uniform percentage of the premium cost for all covered employees.

VIII. 2010 Transition Relief

The IRS issued transition relief for 2010 only so that synagogues that pay at least 50% of the premium for single coverage for each employee enrolled in coverage will not fail to maintain a qualifying arrangement merely because the synagogue does not pay a uniform percentage of the premium for each covered employee.

IX. Claiming the Credit

Synagogues will first need to complete Form 8941 (http://www.irs.gove/pub/irs-pdf/f8941.pdf) to calculate its refundable Tax Credit. Then a synagogue will claim the Tax Credit on Line 44F of Form 990-T (http://www.irs.gov/pub/irs-pdf/f990t.pdf). Most synagogues do not typically file Form 990-T as it is used when there is a tax obligation for unrelated business income. Form 990-T must be used in this instance by a synagogue in order to claim the Tax Credit, regardless of whether the synagogue is subject to the tax in unrelated business income.

Synagogues with a fiscal year ending December 31, 2010 wishing to claim the Tax Credit for 2010 must submit Form 990-T to the IRS by no later than May 15, 2011. All other synagogues must file Form 990-T by the 15th day of the 5th month after the end of its fiscal year.


Step 1: Determine whether your synagogue is eligible le for the Tax Credit by completing the following steps:

A. Calculate the number of FTEEs (see sections IV and V above). If this number is 25 or fewer, go to B.

B.Calculate the average wages of your synagogue's employees (see sections IV and V above). If the average wages are less than $50,000, go to C.

C.Based on the number of FTEEs and average wages, use the table by the congressional Research Service, (http://www.ncsl.org/documents/health/SBtaxCredits.pdf, page 4) to determine the applicable Tax Credit percentage (which cannot exceed 25% through 2013).

D. Determine whether your synagogue has a "qualifying arrangement" (see VII above)

Step 2: calculate the Tax Credit (refer to II above, and go to http://www.irs.gov/pub/irs-drop/rr-10-13.pdf). Use Form 8941 to assist you in determining this calculation. Remember that your Tax Credit may be limited by the actual federal income tax and Medicare Taxes withheld and remitted and by the average premium for the small group market in your state as determined by HHS.

Step 3:  For congregations with a fiscal year ending on December 31, 2010, submit a claim for the calculated Tax Credit on Line 44f of form 990-T by May 15, 2011.  Congregations with a different fiscal year (for example, July 1, 2010 to June 30, 2011) must file form 990-T by the 15th day of the 5th month following the end of its fiscal year.

Example

A synagogue in Illinois employs one Rabbi. He receives a form W-2 from the synagogue. The synagogue also has 1 full time non-clergy employee and 2 part time non-clergy employees. The Rabbi's salary is $87,000. Employee #1 is paid $45,000, employee #2 is paid $25,000, and employee #3 is paid $25,000. The Rabbi, employee #1 and employee #2 are enrolled in a health insurance plan.

The synagogue pays 100% of the rabbi's single employee only premium. The synagogue pays 75% of the single employee only premium for employees #1 and #2. It pays $22,800 for the Rabbi's coverage and $17,100 for the other 2 employees, totaling $ 34,200. A total of $57,000 is paid in health insurance coverage.

Hours worked:

Employee #1 (2,080), Employee #2 (1,040), Employee #3 (1,040), Rabbi (2,080)

Total hours:

FTEE (Full time equivalent employees) 3    (6,240/2,080 hours)

Calculate average wages:

Total wages: $95,000 ($45,000+$25,000+$25,000); Rabbi's wages of $87,000 are not included)

Average wage: $31,000 ($95,000/3 = $31,666.66 rounded down to the next multiple of $1,000)

Credit allowed: 20% (The credit is reduced because the average wages are greater than $25,000. Use worksheet 6 in the instructions for IRS Form 8941 to calculate the credit allowed.)

Employer health care costs are: ($57,000)

Average Illinois premium according to the IRS table found in the instructions for IRS Form 8941 is $5,198.00.

Allowable claim: $3,898. The synagogue can only claim 75% of $5,198 per employee which is what it would have paid if coverage were the average Illinois coverage ($5,198 X 75% = $3,898)

Maximum premium limit: $11,695 ($3898.50 X 3)

2010 tax credit: $2,339 (20% X  $11,695)

The amount is refundable as a credit as long as the synagogue has withheld at least that much from the employee wages combined with what the synagogue paid in employer Medicare Taxes.

 

Resources:

Initial Analysis by the Religious Action Center of Reform Judaism

IRS Notice 2010-82

IRS FAQs

Form 8941

Instructions to Form 8941

Form 990-T

Instructions for Form 990-T

Notice 201-44

Revenue Ruling 201-13 (Small Market Average Premiums)

Board of Pensions, Evangelical Lutheran Church of America


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