Healthcare Reform: Will Small Family Businesses Be Eligible for Health Insurance Tax Credits?
As the first tangible benefits of healthcare reform start to materialize for Americans, many small businesses are happily anticipating some relief on the health insurance front. In the campaign for healthcare reform, President Obama and the Democrats trumpeted the tax credits that small businesses would receive to help provide health insurance to their employees. Since then small businesses have been counting on those tax credits to help them provide employee health insurance and continue on their road to economic recovery.
Unfortunately, as some small businesses have only started to discover, the devil’s in the details of these tax credits, and in particular, many small family businesses may not qualify for tax credits or may qualify for much less in tax credits than they were counting on.
Under healthcare reform, a small business may claim a federal tax credit worth up to 35 percent of what the business spends on health insurance for its employees. To qualify for the tax credits under healthcare reform, a small business must have fewer than 25 full-time employees, have average annual wages of $50,000 or less, and cover at least 50 percent of the cost of healthcare for its employees. The tax credits are calculated on a sliding scale, with the full 35 percent credit going to small businesses with 10 or fewer full-time employees and average annual salaries of $25,000 or less.
However, what many small businesses are not aware of is that any family member of a business owner or a business owner’s partner cannot be counted in the calculation of tax credits. More importantly, a family member’s hours, wages and health insurance premiums cannot be counted in the tax credit calculation, so a small business that mainly employs family members will likely only receive a small fraction of the tax credits it would receive if it employed mainly non-family members.
We understand that the rule was put in place in order to keep small businesses honest and keep them from potentially milking the tax credits by putting a bunch of family members on the payroll. However, considering the many American small family businesses who have been priced out of the health insurance market and are just trying to get by, we can’t help but feel that this rule has missed the boat.