Impact of Health Care Reform on Nonprofits

In March 2010, Congress passed two broad pieces of legislation designed to reform the health care system in the U.S. The new legislation will have a significant impact on employers, including tax-exempt organizations. The following is a summary of several of the provisions that will impact nonprofit organizations, many of which will be effective in later years.

Employer Responsibility. An “applicable large employer,” defined as an organization that employs at least 50 full-time employees during the preceding calendar year, that does not offer coverage to all of its full-time employees, or offers coverage that does not meet certain criteria is subject to an excise tax penalty.

Maintaining Existing Coverage. Employers will be able to avoid certain of the law’s requirements by maintaining the same coverage for their employees after the effective date of the law (March 23, 2010). But keep in mind that at this point, it’s not clear whether minor changes in coverage, even those dictated by insurance companies, will affect the determination that the same coverage has been maintained. These issues will be clarified in future legislation.

Employer Tax Credits. The new law provides for certain tax credits designed to increase levels of health insurance coverage. Tax-exempt organizations would get a 35% credit against payroll taxes.

FSA/HSA/HRA Restrictions.Starting in 2011, employees can no longer receive pre-tax reimbursements from their FSA/HSA/HRA account for non-prescription over-the-counter medications.  In addition, the excise tax on non-qualified HSA withdrawals increases from 10 percent to 20 percent.  Starting in 2013, employee contributions to FSAs will be capped at $2,500 annually, adjusted each year based on the consumer price index.

Employee Reporting. The new law requires employers to disclose on each employee’s Form W-2 the value of the employer-sponsored coverage provided to that employee.

Information Reporting.The new law also changes several tax provisions completely unrelated to health care. One of the most significant changes requires organizations to file Form 1099 for all payments aggregating $600 or more in a calendar year to a single payee, including corporations.