Affordable Care Act Creates Incentives for Small Businesses to Provide Health Benefits

Samantha Darrow Osborne

Recently, the Affordable Care Act (“ACA”) has substantially increased individual penalties, which create an incentive for small businesses to partake in offering insurance to their employees.  In 2015, the penalty for failing to obtain health coverage was determined by the higher of either 2% of household income or $325 per adult and $162.50 per child under eighteen.  However, in 2016 the penalty has substantially increased to either 2.5% of household income, or $695 per adult and $347.50 per child.  These penalties double the 2015 fees, which can be a substantial burden on individuals and families.  Moreover, it is important to note that close to half of the uninsured in the United States are small business owners, employees or their dependents.  Therefore, many individuals looking for employment want to find a job that provides some sort of health insurance benefit.

Attracting and retaining qualified employees is not only necessary to keep a competitive edge in the current economy, but in order to capture potential employees’ interest, many employers need to provide health insurance.  As a recent study showed, “[health] benefits are a very important reason [employees] joined and or stayed with their company.” Likewise, many employees say they would accept better benefits in lieu of a higher salary.  Additionally, employee wellness is a key aspect in having more productive employees and increasing overall profits.   Preventative care helps employees avoid having to take long periods of time off due to illness.  By keeping employees healthy and able to come to work, they are more productive overall.

Furthermore, small businesses now have an opportunity to pass along lower health insurance costs to employees through the ACA Small Business Health Options Program (“SHOP”).  To qualify as a “small business,” a business must employ fifty or fewer full-time employees.  SHOP creates a more level playing field for small businesses by allowing them to purchase insurance at a lower rate through the marketplace, therefore allowing them to pass those advantageous costs onto employees.  Offering benefits to employees may also be beneficial to the small business owners, who may be able to get their personal benefits for less money than if they had purchased them privately.

Small businesses also gain tax advantages when they provide health insurance.  When an employer offers health benefits to employees, it increases the employee’s compensation package, while providing the employer with an income tax deduction for their contribution.  Employers can always deduct 100% of the premiums they pay towards employees’ health insurance.  This makes the employers’ out-of-pocket cost less than the value to the employee.  For example, if an employer offers an employee a $50,000 salary without health insurance, the employer has to pay payroll taxes on the full $50,000.  However, if an employer offers an employee a $45,000 salary with $5,000 in health insurance benefits, the employer can deduct the $5,000 from their taxable income and will only pay payroll taxes on the $45,000 figure.  This incentivizes employers to provide health insurance by permitting employers to save on payroll taxes while offering an enticing benefit to employees.

Finally, but most importantly, the ACA provides small businesses with the potential to receive a generous health care tax credit.  To claim the credit, the business must employ less than twenty-five full-time employees who make an average of less than $50,000 a year.  Additionally, the employer “must cover at least fifty percent of the cost of employee-only health care coverage for each of the employees.”  The business will also need to purchase the insurance through the SHOP Marketplace.  The amount of credit an employer can receive works on a sliding scale, with the maximum credit being fifty percent.  The smaller the business the larger the credit. The tax credit is available to eligible employers for two consecutive taxable years.  Small, tax-exempt employers meeting the stated requirements can also receive a credit of up to thirty-five percent.  

Furthermore, to illustrate how the tax credit works, if an employer has ten employees making $25,000 per employee or $250,000 overall, and the employer contributes $70,000 to employee premiums, the employer is entitled to fifty percent tax credit amounting to $35,000.  These tax credits are retroactive from 2010 on, but the claim for refund must be filed within three years from the time the return was filed.  Thus, small businesses can claim their health insurance tax credit for any year since 2012The credit is also refundable so small tax-exempt employers are eligible to receive the credit as a refund as long as it does not exceed the businesses income tax withholdings.

Although businesses with fifty employees or less are not required to provide health insurance, there are numerous advantages for them to do so.  Small businesses that choose to provide health insurance coverage can attract and retain stronger, more productive employees.  The SHOP marketplace provides a more level playing field with offering lower cost health care premiums to small businesses.  This allows the employer to pass the cost savings onto the employee, while also providing the individual employer a better rate. Additionally, the employer gains tax advantages and a generous tax credit if they choose to provide health benefits.  Thus, making the choice to provide coverage more advantageous for the employer and employee.

Samantha Darrow Osborne is a second year student at Widener University Delaware Law School and a Staff Member on the Delaware Journal of Corporate Law. Samantha has experience  in the public sector at the United States Attorney’s office.

Suggested Citation: Samantha Darrow Osborne, Affordable Care Act Creates Incentives for Small Businesses to Provide Health Benefits, Del. J. Corp. L. (March 19, 2016), www.djcl.org/blog.

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