Understanding small business tax credits for health care


A lot of Minnesotans, especially small business owners, want to know how federal health care reforms will impact them. Last week, Minnesota’s Health Care Access Commission held a hearing to explore the impact on small business.

As HealthCare.gov explains, “On average, small businesses pay about 18% more than large firms for the same health insurance policy.” This is partly because larger companies can pool risks. For this reason, the federal government paid special attention to small businesses when passing the Affordable Care Act. That’s why Congress gave them tax credits.

These credits will be available beginning with 2010 tax filings for employers with 25 or fewer full-time equivalent* employees who pay at least half their employees’ health care costs and average $50,000 annual pay or less, according to a combined report by the Minnesota Departments of Commerce, Health, and Human Services. A federal subsidy will cover 35% of total premium costs for those businesses with 10 or fewer employees averaging $25,000 a year, and graduated amounts for the others, report CNN and Business Pundit. Furthermore, the IRS reports that tax-exempt not-for-profits will also be eligible for a health insurance subsidy, albeit a smaller one.

Beginning in 2014, these tax credits will increase to a maximum 50% insurance premium subsidy. CNN reports that according to the non-partisan Congressional Budget Office, “the tax credit will affect about 12% of individuals covered via the small-group insurance market, lowering their cost of insurance by between 8% and 11%.” The latest numbers indicate up to 94,927 Minnesota small businesses, employing 332,555 Minnesotans, will be eligible for the tax credits.

These tax credits will then phase out between 2014 and 2016, except for those businesses with 10 or fewer employees averaging $25,000 annually each.

Another privilege for smaller businesses discussed by the Health Care Access Commission and HealthCare.gov is that companies ineligible for the tax credits but with fewer than 50 full-time employees will be exempt from penalties larger businesses will face if they do not offer their employees health insurance.

As provisions of the Affordable Care Act continue to take effect, small businesses and others should be sure to keep their eyes open for new benefits coming their way.

*As the IRS explains, “full-time equivalent” means part-time employee hours are totaled and divided by 40, e.g. an employee who works 20 hours per week counts as half an employee.