Will New Health Care Tax Credit Actually Reduce the Number of Uninsured Workers?

More than four million small businesses and tax-exempt organizations may qualify for a new tax credit that is a part of the recently enacted Patient Protection and Affordable Care Act, when its first provision goes into effect this year.

The credit aims to encourage small employers to start offering or continue offering health care coverage for their employees. Up to 35% credit (25% for tax-exempt organizations) on health care premiums is available for employers that (1) pay for at least 50% of the premium cost, (2) have less than the equivalent of 25 full-time workers (this means that an employer with 50 half-time workers may qualify) and (3) pay average annual wages of less than $50,000. The maximum credit goes to employers with 10 or fewer full-time employees with annual average wages of $25,000 or less. There is a gradual phasing out of credit for companies with wages between $25,000 and $50,000 and the equivalent of 10 and 25 full-time workers. Credit increases up to 50% (35% for tax-exempt organizations) in 2014. Credit is applied against income tax, not employment tax, so can only be used by employers that have generated taxable income in any given year.

For example, a company that employs 8 workers, pays $25,000 annual wage to each and spends $40,000 per year on health care insurance premiums may be eligible for a tax credit of $14,000 (35% of $40,000) to be applied in that year against its income tax.

In theory, this tax credit offers a good incentive for successful small businesses (not those operating at a loss but still providing health care insurance to employees) to pay for health care coverage. It will be interesting to see in 2011 how many businesses have actually claimed this tax credit for 2010. This number will show us whether or not this tax credit has achieved its purpose of reducing the number of Americans who do not have health care insurance.