Avoiding the “Pay or Play” Penalty
Some Churches have fallen prey to the “Pay or Play” penalty without realizing the financial incurrence that it will have upon their ministry.
Beginning in 2015, large employers that fail to offer employee health insurance that meets Affordable Care Act (ACA) standards may be assessed a shared responsibility penalty by the Internal Revenue Service. The payment is also known as the “pay or play” penalty.
Churches are not excluded. The IRS is expecting a windfall of $8 billion in penalties this year, with an additional $139 billion over the next 8 years. Non-compliant Churches and Ministries will be responsible for some of this amount.
The IRS knows how to catch you. They now require “large employer” Churches and Ministries to file the new tax Forms 1094-C and 1095-C to report workplace and health plan information.
What Is A Large Employer?
The ACA defines a large employer, including Churches, as one with an average of at least 50 full-time employees (including full-time equivalents) during the preceding calendar year. This means that any Church that had a full-time staff of 50 employees last year meets the ACA large employer definition.
This could get tricky for those Pastors, Bishops, etc. that have more than one Church under your control because the employees of all of them would be added together to determine the 50-employee threshold.
To determine the number employees for this threshold, the Pastor, Bishop, or Church Leaders must determine how many employees worked, on average, at least 30 hours per week during the preceding calendar year. Then the hours for employees who worked less than 120 hours per month are combined and divided by 120 to determine the number of full-time equivalent employees. This means that two part-time employees working 60 hours per month would constitute one full-time employee.
How to Avoid the “Pay or Play” Penalty
Any Church or organization that meets “large employer” status that desires to avoid this penalty must offer employee health coverage that meets three ACA requirements:
- Minimum essential coverage
- Minimum value
- Affordability
Let’s look at each.
- Minimum essential coverage
ACA demands that the Church or Ministry offer minimum essential coverage to at least 95 percent of its full-time employees and their dependents. It must be offered to 95 percent of employees working, on average, at least 30 hours per week and to their dependents up to age 26. Spouses are not considered as dependents for this purpose.
If the “large employer” Church or Ministry does not meet the minimum essential coverage requirement, it could be assessed a penalty equal to the number of its full-time employees for the reporting year, times $2,000.00 if at least one full-time employee purchases health insurance on the exchange/marketplace with premium tax credits. The penalty is imposed monthly ($166.67 per month, subject to inflationary adjustments) and is non-deductible.
- Minimum value
A health plan meets minimum value requirement if it covers at least 60 percent of employees’ health care costs that are allowed under the plan, with employees covering the remaining 40 percent through deductibles and co-pays. The Church can ask its health care provider or a third-party administrator to determine the value of its plans.
An employer will be required to certify on Form 1095-C whether or not its plans meet the minimum value standard. It is absolutely vital that every “large employer” Church or Ministry have written documentation that supports the value of each of its health plans.
- Affordability
ACA requires each health plan to meet an affordability standard, which limits the amount an employer can charge an employee for self-only coverage. There is no limit on the amount an employer may charge for other levels of coverage – i.e. family coverage!
Affordability means that the employee’s cost for self-only coverage cannot exceed 9.5 percent of one of the follow safety nets:
- The employee’s wages in box 1 of Form W-2
- The employee’s rate of pay
- The Federal poverty level
If the “large employer” Church or Ministry fails to meet either the minimum value or the affordability requirement, they are subject to a non-deductible $3000.00 annual penalty ($250.00 monthly, adjusted for inflation) for each full-time employee who purchases health insurance on the exchange/marketplace with premium tax credits.
Paying the Penalty
The IRS will use Forms 1095-C and 1094-C to determine if an employer owes the shared responsibility payment. Therefore, it is vital that these forms be completed accurately. The IRS will review the forms, and contact the employers to inform them of any potential shared responsibility payment liability.
How We Can Help
About 96 percent of Churches are out of compliance with the IRS just on regular required filings and tax laws. How can they possibly know how to properly file the 1095-C and 1094-C? That is why Churches MUST call us today at 800-344-0076 to make the necessary arrangements for Chitwood and Chitwood to do your Church books and ensure that all IRS requirements, including those of ACA, are met.
What you don’t know can hurt you!
CALL NOW! With Chitwood and Chitwood this is “A Ministry – Not A Job!”
