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July 13, 2010

Impact of Health Care Reform Issues for Nonprofits

by Dan Busby


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Editor's Note: Richard Hammar reviews the 2,500-page health care reform legislation that President Obama signed into law in March 2010 in the feature article of the July/August issue of Church Law & Tax Report. Rich's health care reform analysis also is available for individual purchase in Health Care Reform: How the new laws will affect your church--Feature Report.

H.R. 4872, the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act, P.L. 111-152), is a massive overhaul of the U.S. health care system affecting nearly all taxpayers, many employers, and many elements of the health care industry. The Reconciliation Act modifies legislation signed into law on March 23, 2010 that contains the bulk of the health reform law, H.R. 3590, the Patient Protection and Affordable Care Act (Health Care Act, P.L. 111-148).

The federal health care reform law and other recent tax acts will have a substantial impact on churches and ministries. Here are the main issues you may wish to consider:

1. Which organizations are subject to the employer mandate to offer "minimum essential coverage" under a health plan? Only an "applicable large employer" (employing an average of at least 50 full-time employees during the preceding calendar year) is subject to the requirement to offer coverage beginning in 2014. Most small organizations, since they have fewer than 50 employees, are thus exempt from the employer requirement.

2. Keeping the same coverage. Employers will be able to avoid some of the law’s requirements by keeping their coverage the same after the law’s effective date (March 23, 2010). Unfortunately, it is unclear at this time what kind of minor changes will alter coverage, or keep it the same; this will be clarified in later regulation.

Changes that must be made to all plans include:
* waiting periods for coverage must be less than 90 days;
* no lifetime benefit maximum limits;
* dependent coverage for adult children up to age 26; and
* no annual limits on certain types of benefits (unless permitted by later-issued regulation).

3. New benefits and other plan changes. If an employer does not keep its coverage the same, employers will need to make additional changes such as:
* extending 100 percent coverage for preventive care;
* removing any prior authorization requirement or increased cost-sharing for emergency services (regardless of whether the services are provided in or out of network);
* no pre-existing limitation for children under age 19; and
* coverage of routine patient costs in clinical trials for life-threatening diseases.

4. FSA/HRA/HSA changes. The law also will require changes to these types of accounts. In 2011, employees will no longer be able to receive pre-tax reimbursements from their FSA, HRA or HSA for non-prescribed over-the-counter medications, and the excise tax for nonqualified HSA withdrawals will increase from 10 percent to 20 percent. In 2013, employee contributions to FSAs will be capped at $2,500 annually, with the cap adjusted annually to the Consumer Price Index. Existing plans should be revised for the applicable changes.

Planning opportunity: Most churches and small-to-medium nonprofits do not have a properly established plan to reimburse out-of-pocket medical expenses. Even though FSAs will be capped at $2,500 annually in 2013, the benefit of offering an FSA to all staff members on a salary reduction basis is significant. For example, a staff member with marginal state and federal taxes, including social security, of 40% could save $1,000 if they have $2,500 of out-of-pocket medical expenses that are covered by an FSA.

5. Employee notification of value of coverage and exchange information. Effective in 2011, employers will need to start reporting the value of the employer-sponsored coverage to employees on their W-2s. And in March 2013, employers will need to begin notifying employees about state exchanges and the availability of premium subsidies and free choice vouchers, all of which will be available beginning in 2014.

6. Issue 1099s for corporate service providers. One important change made by the Act unrelated to health benefits requires employers beginning in 2012 to provide an IRS Form 1099 to all corporate service providers receiving more than $600 per year for services or property. Currently, 1099s need only be generated for non-corporate service providers and only on services. This provision will create a significant paperwork burden on many organizations. A bill has already been introduced to repeal this expanded reporting requirement (H.R. 5141).

7. Simple cafeteria plans. Beginning in 2011, employers with an average of 100 or fewer employees may establish a simple cafeteria plan. These new plans satisfy the nondiscrimination requirements of a classic Sec. 125 cafeteria plan.

8. Tax credits for small employers. In 2010 through 2013, certain small nonprofit employers (no more than 25 full-time employees with average annual compensation not greater than $50,000) may qualify for a 25 percent tax credit for health insurance premiums. The credit offsets payroll taxes. If the credit exceeds the payroll taxes of the organization during the calendar year, the credit is limited to the amount of the payroll taxes.

9. Payroll tax holiday. This provision eliminates social security (but not Medicare) taxes on wages paid to employees hired between February 4, 2010 and December 31, 2010 if the newly hired workers were formerly unemployed. The new employee cannot be a replacement unless the replaced employee "separated from employment voluntarily or for cause."

From ECFA’s website, www.ECFA.org. Used with permission.

Dan Busby is the president of the Evangelical Council for Financial Accountability and an Editorial Advisor for TheYourChurchBlog.com.

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Posted by Michelle Dowell on July 13, 2010 8:00 AM

Related Tags: benefits, Budget, church budgets, compensation, employment, health care, illness, office, Richard Hammar, salaries, staff

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