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Small Businesses Losing Out on Health Insurance Tax Credit

Amy Higgins

Health care reform gives sizeable tax credits to small business owners if they offer their employees health insurance, but it seems that many small business owners don’t know about them.

Hidden rewards

Starting with the 2010 tax year, business owners with 25 or fewer employees who offer health coverage can receive a tax credit for up to 35 percent 25 percent for nonprofits) of the average cost of a small group plan in the state.

However, a February 2011 Pacific Community Ventures survey of 804 California small business owners shows that 57 percent of them were unaware that these credits actually exist. Once they did learn about the credits, these business owners liked what they heard. More than 40 percent of the small employers who weren’t offering insurance said they would be more likely to do so in exchange for tax credits.

When the health insurance mandate goes into effect in 2014, not only can small business owners receive tax credits, but they also can buy group health insurance policies for their employees through their states’ health insurance exchanges.

When enlightened about the upcoming insurance exchange, 55 percent of employers surveyed said they probably or definitely would participate to get coverage for their employees.

Additional survey findings included:

  • Only 31 percent of small business employers surveyed in California had ever paid all or part of the cost of health insurance benefits for any of their employees in the past. The reason? The majority said they could not afford it.
  • Just over half of the small businesses already offering health insurance said they would be more likely to continue providing it because of the small business tax credits.
  • More than one-third of respondents already offering insurance said the exchange makes them more likely to continue providing coverage.
  • Forty-five percent of respondents were identified as Republicans, 26 percent as Democrats and 21 percent as independents.
  • Twenty-nine percent of respondents owned businesses in the industry and manufacturing sector, 21 percent in the retail and restaurant sector, 44 percent in the service sector and 5 percent in other sectors.

The ticket to tax credits

Tax credits are given to businesses that employ 25 or fewer full-time or part-time employees and that pay at least 50 percent of their employees’ health insurance premiums.

According to Families USA, two half-time workers count as one full-time worker for the purpose of calculating tax credit eligibility. This is a step forward, the nonprofit organization says, because part-time workers are more likely to be uninsured compared with full-time workers. This provision could allow them to enjoy employer-sponsored health insurance.

In 2014, the maximum tax credit for for-profit small businesses jumps to 50 percent of the employer’s contribution toward premiums. According to a 2010 Congressional Research Service report, small employers can claim the full credit amount if they have 10 or fewer full-time equivalent employees and their employees’ taxable wages average $25,000 or less. The credit is phased out as the number of employees and their average salaries increase.

If business owners are fully informed about small business tax credits, they could “play a vital role” in covering uninsured Americans, Beth Sirull, Community Ventures’ executive director, said in a news release about the survey. And that, in turn, could “buoy our economy with a healthy, productive workforce.”

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