Legal Briefs

Tax Impact of Healthcare Reform Law on Small Business

Published Monday, May 3, 2010

In March 2010, President Obama signed into law H.R. 3590 – the Patient Protection and Affordable Care Act. The new law is a massive overhaul of our nation’s healthcare system that affects nearly all taxpayers, many small and large business owners, and much of the healthcare industry.


Whether you approve or disapprove of the new legislation, everyone agrees that the changes to our healthcare system will reach out to touch virtually every employer and employee in some way. Jim Coyle, a tax attorney and estate planning specialist at the Gainesville, Ga. law firm Stewart Melvin & Frost, can help you understand the impact of the new healthcare reform law on small business.


Question: What is the impact of the new law on small businesses?

Jim: Small businesses generally are protected from any of the penalties under the new healthcare reform laws. And they actually benefit in some cases from special tax credits and deductions if they elect to provide employer-sponsored health insurance to their employees.

The new healthcare reform law imposes penalties on larger employers if they don’t provide insurance coverage to their employees. This is the so-called “pay or play” penalty. But most small businesses will be exempted from these penalties if they do not offer coverage to their employers.


Question: What does the government define as a large business?

Jim: That definition varies, but in this specific section of the new healthcare law, you would have to have at least 50 employees. So any small business with fewer than 50 employees would be exempt from the “pay or play” penalty.


For large employers, this “pay or play” fee amounts to $2,000 per full-time employee. But in calculating the tax, the first 30 employees are excluded. So, for example, a company with 51 employees would pay the $2,000 penalty on 21 of its employees – which would amount to a total of $42,000. These provisions take effect on January 1, 2014.

Small employers will receive a tax credit if they provide some level of health insurance to their employees. The new law rewards small businesses with a dollar-for-dollar tax credit (up to 50 percent) if they purchase health insurance for their employees. This credit can be applied toward the employer’s regular federal income tax bill.


Question: How does an employer qualify for the tax credit?


Jim: To qualify for the tax credit, a business must have no more than 25 full-time employees. In this case, the government has a different definition of a “large business.” The annual wages for the full-time employees also must average less than $50,000 in order for the business to qualify.


And yet one more provision: To qualify for the tax credit, the small business employer also must contribute at least half of the total cost of insurance premiums for his or her employees.

Depending on the size of the business and the amount of employee wages, there are varying tax-credit limits for businesses providing insurance to their employees. Only employers who have 10 or fewer full-time employees and average wages of less than $25,000 will receive the full tax credit benefit (and not 50%) allowed under the new law.


Question: When doest the tax credit go into effect?

Jim: The tax credit for providing insurance to your employees will take place in two phases. The first phase takes place over the next four tax years, beginning with this tax year (2010). The second phase of the tax credit takes place for the 2014 and 2015 tax years. During this second phase, the credit is available only if the small business buys health insurance for its employees through a state exchange, an alternative to private-sector insurance. Under this second phase, the tax credit is only available for two years.


In the first phase of the health-insurance tax credits, the small-business tax credit amounts to roughly 35 percent of the employer’s non-elective contributions toward its employees’ health insurance premiums. In the second phase, which starts for the 2014 tax year, the credit goes up to 50 percent. But remember that the tax credit varies: it decreases as firm size and average wages increase.


Question: Are there other benefits for small businesses?

Jim: Another reward from the federal government: Small-business employers will be allowed a deduction for the remainder of their employee insurance costs that are not covered by the small-business tax credit. For example, if you receive a 50 percent tax credit for providing employee health insurance, you can claim a deduction for the other 50 percent of the premium cost.


If you are a self-employed one-man (or one-woman) business, you will not be eligible for any of the small-business insurance tax credit if you are providing health insurance coverage to yourself through the business. This includes partners and sole proprietors in addition to certain employees who happen to have ownership in the company, two-percent shareholders of an S-corporation and five-percent owners of a C-corporation.


The “Cadillac tax” on high-cost health plans. As the healthcare reform laws are phased in, you’ll also be hearing a lot about the so-called “Cadillac tax” for expensive health coverage. In an effort to help pay for the healthcare reform provisions, the government is placing an excise tax on high-cost employer-sponsored health coverage. This is a 40 percent excise tax on insurance companies – based on premiums that exceed certain amounts. This tax is on the insurance companies, not the employers. But in reality, the employers and workers will ultimately bear this tax in the form of higher premiums passed on by the insurers. Stand-alone dental and vision plans will be disregarded in applying the tax.


The healthcare reform law is tremendously complex, involving hundreds of pages of new legislation. I have only covered the most important highlights affecting small business.