Memorandum: Tax Season and the Affordable Care Act

Date: March 21, 2011
To: U.S. Small Business Owners and Their Tax Advisers, Accountants, and Bookkeepers
From: Karen Mills, Administrator, U.S. Small Business Administration

 

 

The Affordable Care Act, the health reform legislation passed into law a year ago, is giving small businesses important tools to help them compete, create jobs and drive economic growth. It’s critical that small businesses take full advantage of the new benefits and consumer protections of the law and understand the positive impact health reform will have on their operations. The SBA and the entire Administration is committed to working with the small business community to ensure that they know about tools in the Affordable Care Act that will help small businesses start-up, succeed, and grow.

Already, the Affordable Care Act is providing tax credits of up to 35 percent of employee premium costs, helping small business owners reinvest thousands of dollars to grow their business and create jobs at tax time.

Eligibility for Tax Credits

Generally, tax credits are available for small business owners who:

  • Have started or continued health insurance coverage for employees in 2010

  • Contribute at least 50 percent of employee premiums at the single coverage rate

  • Have fewer than 25 full-time employee equivalents (part-time employees are counted proportionately)

  • Pay their employees an average of less than $50,000

The IRS has provided a simple three-step worksheet (below and at www.irs.gov/pub/irs-utl/3_simple_steps.pdf) to help determine your eligibility:

Three simple steps. If you are a small employer (business or tax-exempt) that provides health insurance coverage to your employees, determine if you may qualify for the Small Business Health Care Tax Credit by following these three simple steps: Step 1. Determine the total number of your employees (not counting owners or family members).  Add the number of full-time employees to the number of full-time equivalent of part-time employees; the sum is your number of total employees.  (Calculate the number of full-time equivalents by dividing the total annual hours of part-time employees by 2080.) If the total number of employees is fewer than 25, go to step 2. Step 2. Calculate the average annual wages of employees (not counting owners or family members). Take the total annual wages paid to employees. Divide it by the number of employees from Step 1. This equals average wages.  If the result is less than $50,000, and – this is Step 3 – you pay at least half of the insurance premiums for your employees at the single (employee-only) coverage rate, then you may be able to claim the Small Business Health Care Tax Credit. Find more information at IRS.gov.

 

Four million of the nation’s six million small businesses that employ workers could be eligible for these credits. For small businesses, the maximum tax credit is 35 percent of the business’ premium costs, and for small nonprofit organizations, the maximum credit is 25 percent. On Jan. 1, 2014, these rates will increase to 50 percent and 35 percent, respectively. These credits phase out for firms with average wages over $25,000 and for firms with the equivalent of more than 10 full-time employee equivalents.

Effectiveness of Tax Credits to Date

While nearly all firms with more than 200 employees offer health insurance benefits, smaller U.S. firms are much less likely to offer coverage because their premium costs are about 18 percent higher than the same coverage for larger employers. They also have less purchasing power in the health insurance marketplace. Early signs show that these tax credits are stimulating activity in the health insurance market.

A Los Angeles Times report of increased market activity in the small group market at the end of 2010 included three examples of how these tax credits show initial signs of promise:

  • UnitedHealth Group (Minnesota) added 75,000 new customers who work for businesses with less than 50 employees 

  • Coventry Health Care (Maryland), an insurer that focuses on small businesses, signed contracts to cover 115,000 new workers, an increase of 8 percent. 

  • Blue Cross Blue Shield of Kansas City reported an increase of 58 percent in the number of small businesses buying insurance.

Also, a report from the Lincoln Journal Star in February noted:

  • Blue Cross and Blue Shield of Nebraska reported a 34 percent increase in health insurance sales to small businesses for 2011.

In addition, other insurers such as CareFirst Blue Cross Blue Shield of Maryland have announced that they are specifically marketing their products to small businesses due to this credit.

Small businesses themselves have also reported on how these tax credits are helping them provide coverage to employees. Just a few examples from around the country include:

  • Mark Hodesh, owner of Downtown Home and Garden in Michigan, was able to claim $15,000 on his tax return this year and hire an additional employee. 

  • Kiersten Firquain of Bistro Kids in Kansas City was able to start providing coverage to her chefs last year for the first time. 

  • John and Angela Sweet of Niedlov’s Breadwords in Tennessee had been wanting to offer insurance for some time, and when these tax credits made it more affordable, they “jumped at the opportunity.”

If you are interested in learning more about various health insurance plans that are available in your area, I encourage you to visit http://finder.healthcare.gov where you can quickly compare them.

2014: Higher Credits and “Exchanges”

In 2014, the tax credits for small employers who provide coverage will increase from 35 percent to 50 percent. At the same time, small business owners should be aware that states will simultaneously roll out small business “exchanges” that will allow employers with less than 50 employees to band together to leverage their collective buying power, reduce administrative costs, and negotiate fairer rates from insurance companies. These exchanges will be available online, and an independent study suggests that they will help reduce costs and increase competitive pressure on insurers, driving down premiums for small businesses by up to 4 percent.

Repeal Efforts

The President supports eliminating a bookkeeping provision that would unfairly burden small businesses. The Administration continues to work with Congress to repeal the expanded 1099 reporting requirement, which is too big of a paperwork burden on small business owners. Repealing the entire law or preventing key provisions from being implemented, however, would hurt small businesses by:

  • Raising taxes on up to 4 million small business owners who provide employees with health insurance coverage 

  • Preventing the formation of a marketplace where insurance companies compete for your hard-earned dollars 

  • Stifling the ability of entrepreneurs to break out on their own to help America compete in the 21st century

The Affordable Care Act uses market based incentives, such as tax cuts and cost savings, to make quality, affordable health insurance available to all Americans. There is no requirement, mandate, responsibility, penalty or fee of any kind for small businesses with less than 50 workers who choose not to provide insurance, which represents 96 percent of all U.S. firms.

The President has also backed a bipartisan proposal to allow states to implement alternatives to the law beginning in 2014 if those alternatives are able to meet the shared goals of making health insurance affordable and accessible to all Americans, including those with pre-existing conditions.

Instead of re-fighting the battles of the last two years, let’s fix what needs fixing and move forward.

Access to affordable health care is the number-one concern for small businesses across the country. I have worked with many small businesses over the years that are looking at every possible option to offer coverage for their employees, who they often consider to be members of their own family. In 2009, I met a small business owner in New Jersey who said that the day she was able to provide health insurance coverage was the day she knew that her business was a success.

I encourage you to work with your tax adviser, accountant and/or bookkeeper to actively explore the tax credits, exchanges, and other provisions in the Affordable Care Act to help you grow your business and create jobs.
 




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