The New Health Care Law and Small Businesses

Q. We own a small business and can’t afford health insurance for our part-time employees. Will health care reform make things even tougher by making us pay for their health coverage?

A. The law does not require businesses to provide health insurance (although large companies can be assessed a penalty if they don’t). But if you offer coverage, as a small company, you can receive tax credits worth up to 35 percent of the cost of that insurance for tax years 2010 to 2013, and up to 25 percent for nonprofit organizations. In 2014, the credit rises to 50 percent, and 35 percent for nonprofits. More than 4 million businesses and nonprofits offer employee health coverage and are eligible for the tax credit.

Small businesses pay an average of 18 percent more than large companies for similar coverage. That’s because they don’t have as much purchasing power to negotiate lower rates, and one or two workers with high medical costs are not balanced out by a larger number of healthy employees. Once the law’s state-based insurance-purchasing exchanges begin operating in 2014, companies with 100 or fewer employees will be able to use their collective bargaining power to buy less-expensive coverage through this competitive marketplace.

To shop for the best coverage now, small businesses and individuals can use a new government website that provides comparative information about private insurance plans as well as details of the health care reform law that may affect them.

How it works

Companies qualify for the full 35 percent credit if they (1) pay for at least half of the cost of employee coverage, (2) pay average wages below $25,000 and (3) employ fewer than 10 full-time workers. The credit decreases as company size and average wage rise, until it is completely phased out for employers that have the equivalent of 25 full-time workers or more and that pay average wages of $50,000 a year or more.

Following are additional questions about the credits from readers who run small businesses:

How the credit is calculated? Is the employer’s contribution for health insurance deducted from the total cost and the remainder used to compute the tax credit?

The 35 percent credit is based on what the employer alone pays for an employee—including any coverage for a spouse and dependents as well as for coverage for the employer, according to an IRS spokeswoman. For example, if the employer pays $80,000 for employee health insurance in 2010 and meets the requirements for the credit, the amount of the credit would be 35 percent of $80,000 or $28,000, the spokeswoman said.

If companies are not paying any taxes, can they get the credit in cash instead?

Going back to the example above, for a tax-exempt company, the credit is 25 percent of $80,000, or $20,000. Suppose the tax-exempt employer’s withholding and Medicare taxes are $30,000. The total tax credit in 2010 is the lesser of $20,000 or $30,000—or $20,000. Even if the tax-exempt business has no taxable income, it may receive a refund, the IRS spokeswoman said. If the math isn’t exactly crystal clear, the IRS has provided examples on its website of how the credit applies to different kinds of small businesses.

My husband is very concerned about how the new law is going to affect his small business. He thinks he will have to pay a 20 percent penalty for each employee who doesn’t have insurance, even though he offers it. Is that right?

If his business employs fewer than 50 workers, there are no penalties for not offering coverage. Starting in 2014, larger companies that don’t offer coverage have to pay a penalty of $2,000 for each full-time employee if at least one worker receives government help—a tax credit—to purchase his own health insurance. Companies with 50 or more workers that do offer coverage will pay a penalty of as much as $3,000 per full-time employee if one receives the tax credit for buying health insurance.

I have four part-time employees and two full-time employees. The two full-time employees have insurance paid for by my business. One of the insured has a preexisting condition, which makes the rates very high. Will those rates go down?

Not right away. Charging higher rates for individuals with health problems will be prohibited when the insurance exchanges are available in 2014. Then, under the pricing rules Congress established in the health care reform law, insurers will be not be able to raise rates for small businesses with sicker employees or when a worker becomes ill. Limits will also be placed on how much more insurers can charge for older workers—no more than three times the cost of a younger person.

For more details about the tax credit and other benefits, the Department of Health and Human Services has created a special website for small businesses.

Susan Jaffe of Washington, D.C., covers health and aging issues and writes the Bulletin’s weekly column, Health Care Reform Explained: Your Questions Answered.