Health Policy Brief: Small Business Tax Credits
January 18th, 2011
by
Chris Fleming
|
A new Health Policy Brief from Health Affairs and the Robert Wood Johnson Foundation describes new incentives under the Affordable Care Act for small business owners to provide health insurance coverage for their employees. Employees of small businesses are least likely among all employed workers to have health coverage. Millions have also lost coverage in recent years as unemployment has risen, the costs of health insurance have risen sharply, and many small firms have stopped contributing to their workers’ coverage.
In the Affordable Care Act, the key reform for small businesses is a federal income tax credit, newly effective as of the 2010 tax year. An employer with 10 or fewer full-time employees and with average annual wages of up to $25,000 can receive a credit toward payment of its federal income taxes equal to as much as 35 percent of the amount the company contributes toward employee health insurance premiums. (A tax-exempt employer can receive a refund of up to 25 percent.) For larger organizations and higher average salaries, the tax credit decreases in value. It phases out completely for firms with 25 or more employees and average annual wages of $50,000 or more.
This Health Policy Brief provides background on small employees’ health coverage and analyzes provisions of the legislation, including the following:
- How and why small companies face particular difficulties in obtaining insurance coverage for their workers, including larger per-employee costs of coverage. These firms now pay up to 18 percent more in premiums than do large firms. These higher premiums are because of higher administrative costs and the smaller “risk pools,” of individuals to be covered, which means that they are less able to spread the costs of sicker workers across a broad pool of healthier ones.
- How a small business would determine whether it qualifies for the credit and how the size of the credit would be calculated.
- Whether or not the new law will motivate small businesses not offering health insurance to do so, and the varied reaction from small business owners to the new tax credit.
About Health Policy Briefs:
Health Policy Briefs are aimed at policy makers, congressional staffers, and others who need short, jargon-free explanations of health policy basics. The briefs include competing arguments on policy proposals from various sides and the relevant research supporting each perspective.
Previous policy briefs have addressed:
- Preventive Services: The Affordable Care Act mandates coverage for the complete cost of 45 preventive services, both for those with new private insurance plans and Medicare patients.
-Early Retirement Insurance: A new temporary program is designed to shore up health insurance coverage for early retirees – individuals between 55 and 64 — who have left employment and are not yet eligible for Medicare.
-Medical Loss Ratios: The Affordable Care Act and implementing regulations require insurance companies to invest most of the premiums they collect on health care for policyholders.
-Grandfathered Insurance Plans: Certain existing insurance plans are exempt from some of the Affordable Care Act’s requirements.
Sign Up For Health Policy Briefs
Health Policy Briefs offer more context than fact sheets but are more easily read than many other backgrounder papers. The information is objective and reviewed by Health Affairs authors and other specialists with years of expertise in health policy.
You can sign up for e-mail alerts from Health Affairs about upcoming briefs. The briefs are also available from the Robert Wood Johnson Foundation’s website. Please feel free to forward the briefs to any of your colleagues who are tracking health issues. And after you’ve taken a look, we welcome your feedback at hpbrief@healthaffairs.org.
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