Why Are Small Businesses Forgoing Affordable Health Insurance Tax Credits?

It seems like a win-win situation for small businesses: provide health insurance

coverage to your employees (which keeps you compliant with the new healthcare reform legislation), and recieve tax credits. The federal government even funded an informational mailing about the credits to four million businesses earlier this year. Unfortunately, there are several pitfalls.

Second to those who are unemployed, those who work for small companies are likely to be uninsured. That is because health care tends to cost smaller businesses more on a per-person basis. Unlike larger corporations, they are unable to take advantage of a volume discount or spread the risk among a larger number of individuals.

Since healthcare reform is intended to increase access to affordable health insurance, it includes several provisions to encourage small businesses to offer health benefits. The most notable is a series of tax credits for small businesses. The credits cover up to 35 percent of the cost of health insurance premiums.

While that sounds ideal, there is a catch: the full value of the credit only applies to employers with fewer than 25 employees and average annual wages of over$25,000. Although the latter is not quite poverty level, it is difficult to support a family on that income. The Obama administration inadvertently appears to be suppressing salaries and employment. This is not a good strategy in a struggling economy.

The tax credit decreases to 10 percent, and then dissapears entirely for companies that pay an average of over $50,000 to their employees. The Small Business Administration defends its limited scope by pointing out that the credit is targeted mostly towards lower-wage employees at tiny companies that are least likely to have employer-based health insurance. Limiting the tax credits was also necessary to clamp down on the cost of the healthcare reform law, especially since much of Congress was extremely concerned about its impact on the budget deficit.

Neither is it cost-adjusted for different states, which significantly reduces its appeal in states with a higher cost of living (and therefore healthcare). The average tax benefit of $200 per employee is a drop in the bucket, according to brokers who are not seeing much of an increase in small group health insurance sales.

Why Are Small Businesses Forgoing Affordable Health Insurance Tax Credits?

By: Yamileth Medina

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