En español | Craig Larsen, who owns a financial planning firm in St. Charles, Ill., is eyeing a once unheard of incentive for a new employee: health insurance.
Under the new health care reform law small business owners are now eligible to receive a tax credit for providing health care coverage, which is retroactive to the beginning of the year.
“I’m looking forward to taking the credit,” says Larsen. “It’s not a huge amount, but it will help.”
While employees of big companies expect to have health care coverage as a fringe benefit, it’s a rarity for those working in small shops and businesses. And yet, companies with fewer than 100 workers employ about 43 million Americans. So the new tax incentive is potentially good news for people currently working in those businesses who have no health insurance. Moreover, although it’s too early to tell, the credits also could give a huge boost to those running or starting new businesses. Assuming that premiums don’t skyrocket, it may be easier to attract and retain employees.
Tax break available now
The tax break is one of the first health care reform provisions to go live. It is designed to encourage small employers to offer insurance for the first time or maintain coverage they already have.
The amount of the tax credit an employer could receive works on a sliding scale. The maximum credit goes to smaller employers—those with 10 or fewer full-time equivalent employees—paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more full-time employees, or that pay average wages of $50,000 per year or more.
What are the rules?
As with any IRS regulation, there are a bevy of catches. The credit applies to businesses that have picked up the tab for at least half of the premiums for their employees this year. It doesn’t apply to businesses that simply make insurance available but don’t pay anything toward the premiums.
For tax years 2010 through 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers. Tax-exempt organizations only qualify for a 25 percent credit.
Because the eligibility rules are based in part on the number of full-time employees—not the total number of employees—businesses that use part-time help may qualify even if they employ more than 25 individuals.
Claim the credit on 2010 income taxes
Eligible small businesses can claim the credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide further information on how to claim the credit. The ever-diligent agency has already mailed postcards to some four million businesses simply alerting them about the break.
The credits are best suited for companies employing middle to low-wage workers. Say you are paid $25,000 a year in salary and your employer pays $6,000 a year in premiums. Your employer’s credit would be worth $2,100 for a net cost of $3,900 for insurance. For an employee making $45,000 with the same premium, the credit would only be worth $400.
The success of the credit in encouraging business owners to provide insurance will largely depend on the growth in premiums.
Should insurers pass along higher operating costs to employers as medical costs rise, then the increased expenses may negate the value of the credits. Keep in mind that the health care reform act did nothing to directly police the cost of insurance.
Benefit will increase
While the tax breaks are carrots to get small businesses to pay for insurance, the major benefits of the reform law won’t kick in until 2014. Starting that year, not only does the small-employer tax credit jump to 50 percent, but small business owners and their employees will have new coverage options through the state-based insurance exchanges that are scheduled to be in place then.
The exchanges will offer policies for workers who either are self-employed or work for businesses that don’t offer coverage. Businesses with fewer than 100 workers will also be able to buy insurance for their employees through an exchange.
Ideally, these exchanges will provide lower-cost plans to a wider segment of the population, although there is nothing in the law that will require lower premium pricing. There is no guarantee that they will be less expensive than individual plans are today if the exchanges prove unpopular.
The theory behind the exchanges is that they will pool larger numbers of (healthy) people to reduce overall costs.
The exchange-offered plans will carry a set of mandated benefits in four different tiers ranging from high-deductible policies to ones that cover 90 percent of all costs. Subsidies will be available for people with incomes below a certain level.
It will be a long slog for government bureaucrats in the interim. They have to write the regulations for business coverage, determine how to administer the various provisions and tax credits, and police the industry. Until then, small employers will be on their own to find affordable policies for their workers, despite the tax break.
John F. Wasik, author of His Audacity of Help: Obama’s Economic Plan and the Remarking of America, covers health care for magazines, online sites and newspapers.