When Josh King heard that small businesses could get a tax credit for offering health insurance to employees, his reaction was, “Cool, that’ll save us some money.”
Then he looked at the not-so-fine print. The 23 employees of Avvo Inc., a website that provides legal, medical and dental advice, makes too much money for the company to qualify for the credit.
“It was a little bit disappointing. It was a little bit more limited than I thought,” says King, the general counsel for the Seattle-based company.
Congress created the tax credit in 2010 as part of the overhaul of the healthcare system. It was intended to be an incentive for small businesses to offer health insurance. But many companies have found that they don’t qualify. The cumbersome process for filing a claim to get a credit has discouraged others from even trying.
“In some cases, it’s more hassle than it’s worth,” says Teri Gutierrez, regional sales manager for JBA Inc., an insurance broker in Raleigh, N.C. She says most of her small business clients aren’t trying to get the credit.
King’s hopes were dashed by the rule that disqualifies a company if its employees earn an average of $50,000 or more a year. That’s a low wage for people in the high-tech industry, he says.
There are numerous hurdles companies must meet to qualify for the credit. Among them:
• The business should have fewer than 25 full-time employees or the equivalent of 25 full-time employees. That means, if a company has 10 full-time employees and another 10 who work half time, it has the equivalent of 15 full-time employees.
• Employees can’t be owners such as sole proprietors and partners. Certain shareholders are excluded depending on the structure of the corporation and how much stock they own. They also cannot be members of the owner’s extended family including spouses, parents, children, siblings, aunts, uncles, nieces, nephews, step-family members and in-laws. There’s no tax break for premiums paid on relatives’ insurance — and very small businesses tend to have family members on their payrolls.
• The business must pay at least half the insurance premiums for employees.
And that’s just the start. The Internal Revenue Service form needed to claim the credit, Form 8941, requires a complex series of calculations. The credit, which is a maximum of 35 percent of a company’s premiums, can be reduced by a number of factors including any state subsidies a company gets for its premiums. It can also be reduced if premiums are higher than the average for coverage for small businesses in your state.
“The calculations are mind-numbing,” says Jeffrey Berdahl, a certified public accountant with RLB Accountants, an Allentown, Pa., accounting firm whose clients include small businesses. Berdahl says his firm, whose partners collectively have decades of experience as CPAs, had to create a spreadsheet to help determine whether clients would be able to get a credit. But he said only a handful did, and received “a nominal amount” of money back. For many, the credit was offset by the fees they had to pay their accountants.
BETTER THAN NOTHING?
Although the credit was created to encourage more small businesses to offer health insurance, buying insurance, like any other business decision, shouldn’t be based solely on whether you’ll get a tax break. It should have a solid business reason behind it.
Insurance is a significant expense, and more so for small businesses, simply because it costs more per employee when a company has fewer people to cover. According to a Department of Health & Human Services study in 2009, the average annual premium for an employee in a company with fewer than 10 employees was $4,982. That is a lot of money to small companies — 83 percent of which don’t offer health insurance, according to the Government Accountability Office, the investigative arm of Congress. (The average premium for companies of all sizes was $4,669).
The tax credit doesn’t factor in a small company’s decision to provide benefits, says Neil Crosby, a health insurance broker with Warner Pacific Insurance Services in San Diego. Crosby says many small businesses he deals with aren’t aware of the credit. And many of his clients who do try to get the credit find they don’t qualify.
But those who do succeed are glad to have some cash back from the government.
Matt Helbig was already providing health insurance for the eight full-time employees of his three running and walking shoe stores in the St. Louis area at a cost of about $20,000 annually. He decided to try for the credit. He got back $1,900 for 2010, and $1,100 for 2011. The money came at a price — “it took our accountant a pretty significant amount of time to put it together,” says Helbig, CEO of Big River Running Co. His accountant’s fee for computing the credit last year came to $700.
But Helbig is still happy: “It’s definitely better than nothing.”