4/8/2010, By Bill Leonard, Society of Human Resources Management
It’s probably an understatement to say that the 2010 U.S. health care reform law has created some anxiety and confusion among small business owners. When the National Federation of Independent Business (NFIB) held a teleconference on the impact of the new law on small businesses, more than 12,000 people from throughout the United States called in. And the week after President Barack Obama signed the reform legislation into law, traffic nearly overwhelmed the web site that the NFIB had set up to answer questions.
“The interest among small businesses on how the law will directly affect them is very high right now,” said Michelle Dimarob, manager of legislative affairs for the NFIB, a Washington, D.C.-based small business association with more than 200,000 members.
While businesses with 50 or fewer employees are exempt from the tax penalties the law will impose on employers that don’t provide health care benefits to workers, owners of the smallest U.S. businesses still are seeking more information on a tax credit and new reporting requirements created by the law. Under the legislation, businesses and tax-exempt organizations with fewer than 25 employees that provide health insurance coverage to their employees can qualify for a special tax credit.
The credit is designed to encourage small employers to offer health insurance coverage for the first time or to continue to provide health care benefits. Small businesses that pay at least half the cost of health care coverage for their employees are eligible for the credit.
“Small business owners are very interested in this tax credit, and many are trying to figure out if their company qualifies,” said Di Ann Sanchez, SPHR, president of DAS HR Consulting in Fort Worth, Texas.
Sanchez said that she received more than 200 questions from small business owners and managers during a recent seminar and discussion on the reform law. Most of the questions she received asked about qualifying for the tax credit and if the law would make health insurance more affordable for businesses with fewer than 50 employees.
“Small business owners are exploring all their options. Most want to do the right thing for their employees; they’re just unsure how to do it with the new law in place and just how much it’s really going to cost them,” said Sanchez, who has dozens of clients with fewer than 50 employees.
According to officials with the IRS, the tax credit is targeted to help small businesses and tax-exempt organizations that employ low- and moderate-income workers. The credit will be available for employers with fewer than 25 full-time employees who earn an average of $50,000 or less per year. Since the eligibility formula is based in part on the number of full-time equivalent (FTE) employees, some businesses could qualify even if they employ more than 25 workers.
Eligibility Formula Posted
The IRS has posted the eligibility formula online to help businesses determine if they qualify for the tax credit. The formula uses the number of work hours an organization reports on its payroll for the year. For example, a company with 10 workers (some part-time) reports 15,400 work hours for the past year. In the IRS formula, the total work hours are divided by 2,080 (or 40 hours times 52 weeks). In this example, the employer would have 7.4 FTE employees, which is then rounded down to seven FTE workers for the company.
The tax credit will be on a sliding scale and based on the number of workers and percentage of the health insurance premium that employers pay. To qualify for the credit, employers must pay at least 50 percent of the insurance premiums.
The maximum credit available in 2010 is 35 percent of the premiums paid by qualified small businesses and 25 percent of the premiums paid by eligible tax-exempt organizations. In 2014, the maximum credit will increase to 50 percent of premiums paid by small employers and 35 percent of premiums paid by tax-exempt organizations.
The maximum tax credit will be available only to employers with 10 or fewer FTE employees who earn an average of $25,000 or less each year. Eligible small businesses can claim the credit as part of a general business credit starting with 2010 income tax returns filed in 2011. The tax credit is set to expire in 2016.
According to the NFIB’s Dimarob, the Congressional Budget Office estimated that 12 percent of small businesses (25 or fewer employees) would qualify for the tax credit. However interest in the tax credit is still strong among small businesses as they examine the possibilities of offering their employees health care benefits.
“I believe most small businesses would like to provide health benefits to their employees, because it makes good business sense to look out for the welfare of your workers,” said Shawn Nowicki, director of health policy for the New York Business Group on Health and HealthPass. “Right now, smaller businesses are just unsure what all the ramifications of the health reform law will mean to them and if the tax credit will be worthwhile and adequately offset the costs of providing health care benefits to their workers.”
Nowicki and Sanchez said that the available tax credits and potential tax penalties for employers with more than 50 workers could cause many smaller businesses to rethink any hiring or expansion plans.
“It could have a negative effect on hiring as businesses figure out just how much the new law and offering health benefits will actually cost them,” Nowicki said.
Sanchez agreed and said that many of her small business clients have kept their staffs below 50 workers to avoid the complicated compliance requirements of laws such as the Family and Medical Leave Act.
“The new tax penalties for businesses with more than 50 employees will certainly make many business owners think twice about expanding and hiring more people,” Sanchez said.
As the new tax implications and requirements of the new law take effect, Nowicki says, most small business owners are taking a wait-and-see attitude. The U.S. Department of Health and Human Services will develop most of the regulations.
“While some businesses will move to take advantage of the tax credit, I believe the real change for small businesses and how they purchase health insurance will come in 2014 when the health care exchanges start operating,” said Nowicki.
Exchanges Might Cut Costs
Small businesses will able to purchase health insurance plans through the state-run exchanges starting in 2014. Analysts have predicted that the exchanges will help insurance companies reduce their administrative costs, and some have estimated that health insurance premiums could be cut an average of between 4 and 5 percent.
Small businesses already are showing interest in the health care exchanges, which will be set up as online marketplaces where businesses and individuals can shop for insurance policies. Sanchez said she’s received dozens of questions on the exchanges from employers—with many asking how they can help their employees use the exchanges to purchase health insurance.
“Even if the business owners decide not to provide health benefits, they understand that their employees will be able to purchase individual coverage and receive a federal subsidy to help them pay for health insurance,” Sanchez said. “Many of the business owners that I’ve spoken with have asked me: ‘What can we do to help our employees make the right decision and get the coverage that suits them best?’”
While small businesses are gathering the information and weighing their options, the NFIB’s Dimarob said that much of this interest has begun to focus on the new tax reporting requirements included in the law.
The reform law will require all businesses to report the value of health care benefits on employees’ W2 forms every year. In addition, businesses must create and submit a 1099 tax form for every payment to individuals and other businesses of $600 or more.
The 1099 reporting requirement was designed by Congress to track business transactions that tend to be missed by the IRS and to tap into a potential new stream of tax revenue, according to Dimarob. She says that these extra tax reporting requirements could prove burdensome and that small businesses need to be prepared.
“It’s an unfortunate part of this law that it will place more administrative and tax revenue burdens squarely on the shoulders of small business,” she said.
Bill Leonard is a senior writer for SHRM.
Related Article: Tax Credits for Small Businesses, SHRM Online Legal Issues, March 2010
