Health Affairs

Small Business Tax Credits

Bethesda, MD -- 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 details 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.

Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears each month in print, with additional Web First papers published weekly at www.healthaffairs.org. You can also find the journal on Facebook and Twitter and download Narrative Matters on iTunes. Address inquiries to Sue Ducat at (301) 841-9962 or sducat@projecthope.org