Tax Credit to Pay Third of Small-Business Health Cost (Update1)

By Drew Armstrong, Businessweek.com (Bloomberg) -- As many as four million small businesses in the U.S. may qualify for tax credits to recover more than a third of the cost of providing medical care for employees, under a program created by the health overhaul law.

Businesses with less than 25 full-time employees each will be eligible, according to a U.S. Treasury Department fact sheet made public today. Enterprises that qualify will get 35 percent of the cost of employee health-care premiums reimbursed by the government, beginning this year, and 50 percent starting in 2014, the fact sheet said.
The health law was signed in March by President Barack Obama. The administration estimates the credit will save small businesses $40 billion through 2019. For example, a restaurant with 10 employees, each earning an average of $25,000 a year, might offer insurance costing $6,000 a worker. The credit in that case would be $21,000, the fact sheet said. A tax credit reduces liability for federal tax.

“We know that small businesses want it, because right now half of the small businesses between three and 10 people don’t provide health care, and they’re looking for it,” Karen Mills, the head of the Small Business Administration, said on a conference call today.

To be eligible, companies have to pay, up front, at least half the cost of employees’ insurance premiums. Only companies with 25 or fewer workers may take the credit, and the average salary of the employees must be less than $50,000, the SBA said in a statement.

Counting Workers

Small businesses can accrue the tax credits for dental and vision care, on top of standard health insurance, according to the guidance. The program also lets businesses use any of three ways to calculate how many employees will be eligible toward the credit, and use the one most favorable to their getting insurance.

The new rules “will make it easier for small-business owners to determine whether they’re eligible for the new tax credit,” Labor Secretary Hilda Solis said on the call.

The guidance will help more businesses take advantage of the credit, though most of the businesses that take the credit will be ones already offering health coverage, said James Gelfand, director of health policy for the U.S. Chamber of Commerce, the lobby group that represents business interests in Washington.

“We still think that this credit isn’t great,” Gelfand said. “It’s too small, and most firms won’t be eligible for it.”

The administration doesn’t have an estimate of how many eligible small businesses will use the credit, said Michael Mancuda, assistant secretary for tax policy at the Treasury Department.

--Editors: Jeffrey Tannenbaum, Angela Zimm

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.