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Small Business Tax Credits Under the ACA Examined

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Small Business Tax Credits Under the ACA Examined

Small business tax analysis

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One of the key elements within the PPACA is targeted toward America's smallest businesses; those with less than 10 employees. These businesses are the least likely to offer health insurance coverage as rates of skyrocketed over the last 5-10 years. One such provision to aide these employers is a tax credit targeted to small businesses with fewer than 25 employees.

Background

On average, small firms pay up to 18 percent more in premiums than do large firms for the same health insurance coverage. According to a recent report by the Commonwealth Fund, one-third of working adults were employed by companies having fewer than 50 employees in 2007 (the most recent year available). During that year, 36 percent of employees at these smaller firms were uninsured, compared to 15 percent of employees at larger firms.

Starting in 2011, employers with 10 or fewer full-time employees that have average wages of up to $25,000 became eligible for the maximum credit of 35 percent of the amount the company contributes toward its employees health insurance premiums, with the credit applied to the employer’s tax liability for the year. Companies eligible for the credit employ 16.6 million workers, with experts estimating that businesses employing 3.4 million of them (about 20 percent) will take the credit between 2010 and 2013. The federal government has notified 4 million companies that they may be eligible for the credit.

How the Tax Credit Works

The tax credit offsets a portion of the employer’s federal income tax liability for the year. Tax-exempt employers receive the credit as a refund, with the provision that the refund cannot exceed the amount of federal income tax and Medicare payroll tax that the employer withholds from the employees’ wages, plus the Medicare tax paid by the employer.

Here's the specifics:

  • The tax credit decreases as the number of employees approaches 25 and as average annual wages approach $50,000.
  • To qualify for the credit, an employer must pay at least half the premium for each employee. The percentage paid by the employer should generally be uniform for all employees, although special provisions will apply when a small employer offers its workers a choice of health plans. Since the law was enacted in March 2010, and employers may not have had time to adjust their policies, the Internal Revenue Service (IRS) in 2010 allowed employers who paid at least half the premium to qualify, even if the percentage of premium paid was not uniform across their entire work force.
  • From 2014 on, the maximum credit will increase to 50 percent (35 percent for taxexempt employers). However, coverage will have to be purchased through one of the new state-based health insurance exchanges. The credit will only be available to any employer for two consecutive tax years after 2013.

Health insurance exchanges:

By 2014,states are required to establish Small Business Health Options Program (SHOP) exchanges that will help companies with fewer than 100 employees to purchase health insurance. States may choose to combine the SHOP exchanges with a separately required exchange for individuals. Prior to 2016, states may also choose to limit the SHOP exchanges to employers with fewer than 50 workers.

If individuals and families are not offered employer-sponsored coverage from the firms they work for, they may buy subsidized coverage through the individual exchanges. Subsidies will be available to those whose income is between 133 percent and 400 percent of the federal poverty level.

  • 133% of FPL was about $29,327 in 2010 for a family of four.
  • 400% of FPL was about $77,175 in 2010 for a family of four.

Analysis:

Opponents of the PPACA have argued that the tax credit program is too complicated and too limited in scope offering help only to those companies that are already offering coverage. In addition they cite a potential disincentive for businesses to hire new workers if they are on the edge of expanding their business from 24 to 25 employees when if they do they might no longer qualify for the credit.

Another huge factor that critics rightly complain about is that the health law does precious little to address rising health care costs, a prime concern of small business owners.

Something that really concerns me, and I have found no answers yet, is the impact of the PPACA and the tax credits on small, professional firms with fewer than 10 employees and high salaries (above $25,000 per year).

I offer two examples to illustrate my point.

  • A friend of mine owns a small architectural firm and has four total employees with an average salary of over $50,000. The firm qualifies for the tax credit based on size, but not on the salary scale and it looks to me like they do not qualify for the tax credit.
  • Another friend owns a dental clinic with 16 employees (3 dentists, 9 hygenists, and four office staff. The clinic's average salary is almost $63,000. Is this employer going to pay a penalty for not providing health insurance and then the individuals will get coverage through the Exchange?

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