H&W: Sequestration and Tax-Exempt Health Care Credit

Sequestration and Tax-Exempt Health Care Credit: The Affordable Care Act (ACA) provides a tax credit to eligible small employers to assist them with purchasing health insurance for their employees. An eligible small employer generally has no more than 25 full-time equivalent employees (“FTEs”) during the employer’s taxable year, whose average annual wages do not exceed $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs whose average annual wages do not exceed $25,000. An eligible small employer also must contribute more the 50% toward the health insurance premium.

Tax-exempt organizations are also eligible for the credit, although the applicable credit percentage during the first phase of the credit (taxable years beginning in 2010, 2011, 2012, or 2013) is limited to 25 percent and the applicable credit percentage during the second phase (taxable years beginning after 2013) is limited to 35 percent.

On its website, the IRS says that these tax-exempt employers’ claims will be reduced by 8.7% as a result of the sequestration’s automatic cuts that took place in March. According to the IRS, this sequestration reduction rate will be applied until the end of the fiscal year or intervening Congressional action, at which time the sequestration rate is subject to change.