Small Business Health Insurance Credit — Nice in Theory But Not in Execution

Like a lot of tax credits, the credit available to small businesses that provide health insurance is nice in theory but is horribly executed.

That may be why less than 12% of eligible businesses are claiming the credit.

Who is Eligible for the Credit

Small businesses, defined as those employing less than 25 full-time employees, may be eligible to claim a credit for providing health insurance to their employees. Specifically, the credit is available to companies:

  1. That employ less than 25 employees AND
  2. Pay those employees less than $50,000 of average annual wages AND
  3. Pay more than 50% of the insurance premiums for their employees.

The credit is 35% of premiums paid in 2012 and 2013. The credit increases to 50% of premiums paid starting in 2014.

Sounds great, right? Well … not so fast.

There are many, many problems with this credit. One,  it’s quite possible that a business might be better off NOT taking the credit and instead just taking a deduction for the premiums paid. In other words, some businesses might owe more tax by claiming the credit! (I have run the numbers on this, and it’s true.)

In addition, the credit has unfriendly phaseouts: as soon as your employee count gets above 10 or average wages tick above $25,000, the credit starts to phase out. Plus, the calculation of full-time employees, and the calculation of the credit in general, is cumbersome.

With these things in mind, it’s no wonder that most businesses aren’t taking the credit.

I sense that this blog post will get lengthy, so I am going to break it up into several parts, which I’ll post over the next few weeks. I’ll be mixing in other stories along the way, though, so that this blog doesn’t get bogged down in talking about multiple parts of this story for weeks on end.