Employee benefits for nonprofits and faith-based employers

Employer Playbook

Nonprofits compete for the same people as for-profit employers, usually with tighter budgets and different rules. Four things to get right: who counts toward the employer mandate, whether volunteers count, whether a church plan exemption really applies, and how unemployment costs are handled.

Key takeaways

• Nonprofits are not exempt from the ACA employer mandate. An organization averaging 50 or more full-time equivalent employees is an applicable large employer.
• Bona fide volunteers are excluded from hours of service, but the organization should document their status.
• Church plans can be exempt from ERISA, which removes federal reporting duties and also removes federal preemption, and the definition is narrower than many assume.
• In Michigan, 501(c)(3) organizations can elect to reimburse unemployment claims dollar-for-dollar instead of paying unemployment tax.

Counting employees correctly

The employer mandate applies to an employer with an average of at least 50 full-time employees, counting full-time equivalents for part-time hours, over the prior year. Nonprofits are included, and related organizations may need to be aggregated under the controlled group and affiliated service group rules. A parent organization, a foundation and a school that share management can be one employer for this test. Count each year, because crossing the line triggers filing obligations and penalty exposure. For 2026 the penalty amounts are $3,340 per full-time employee for failing to offer coverage and $5,010 per affected employee for coverage that is unaffordable or lacks minimum value, but confirm the figures against current IRS procedures.

Volunteers are different. People who serve a 501(c) organization or a government and receive only expense reimbursement, reasonable benefits or nominal fees are excluded from hours of service under the regulations. Keep written records so that someone who receives a stipend does not turn into an uncounted employee in an audit.

Church plans and the ERISA exemption

ERISA exempts a “church plan,” defined as a plan established and maintained by a church or by a convention or association of churches, and including plans maintained by an organization whose principal purpose is administering or funding benefits for church employees if it is controlled by or associated with a church. The Supreme Court held unanimously in 2017 that a plan does not have to be originally established by a church to qualify. The question of what counts as a principal-purpose organization is still being litigated. A church plan is not required to provide a summary plan description or file a Form 5500, but it also does not enjoy ERISA preemption, so participants may bring state-law claims, and federal COBRA does not apply, although some states have their own continuation rules. We do not assume that being a church plan removes the ACA employer mandate; the tax code has specific rules, so ask counsel before relying on it.

Do not skip a Form 5500 or an SPD on the strength of a belief that you qualify. Confirm church plan status in writing with benefits counsel first.

Costs that are particular to nonprofits

Michigan allows nonprofit organizations to elect reimbursing status for unemployment insurance, paying the cost of claims actually made instead of a tax rate. It can save money for a stable workforce and hurt a budget when layoffs follow a lost grant, so model it before electing. More broadly, grant cycles and restricted funds make the timing of a renewal important: a plan year that ends before a grant is renewed leaves a gap. Ask your broker to build the renewal calendar around your fiscal year, and to price contribution strategies that work for lower-paid staff.

What to review each year

• Full-time equivalent count for all related organizations
• Volunteer and stipend records
• Affordability test for your lowest-cost plan
• Whether any plan claims church plan status, and the written basis for it
• Unemployment funding method and reserve
• Benefit options that suit a mission-driven workforce: dental and vision, voluntary products, student loan repayment and flexible schedules where possible

Questions we get

Do small nonprofits have to offer coverage?

Not under the employer mandate if they average fewer than 50 full-time equivalents. They may still want to offer it to compete for staff, and small group tax credits can apply to eligible small employers.

Can a nonprofit use an HSA or flexible spending account?

Yes, these are generally available to nonprofit employers, but confirm details with your administrator.

Is a multi-employer plan available to nonprofits?

Sometimes, through associations or captives. Association arrangements can raise multiple employer welfare arrangement questions, so have counsel review them.

Sources: 26 CFR 54.4980H-1 and related ACA employer mandate rules; ERISA section 3(33) and Advocate Health Care Network v. Stapleton (2017); Michigan Unemployment Insurance Agency guidance; IRS 2026 employer shared responsibility amounts. This is general information and not legal advice.

Running benefits on a nonprofit budget? Send us your renewal and we will build the renewal calendar around your grants and fiscal year.