Small businesses eligible for new tax credit under health care reform

The Lee State Bureau

by Mike Dennison

HELENA – For owners of most small businesses, the federal health reform bill passed last month creates a new tax credit if they offer employees health insurance and pay for at least half its cost.

The tax credit, which starts this year and is worth up to 35 percent of the business' cost of providing that health coverage, is supposed to encourage more business owners to help finance coverage for their workers.

Shalon Hastings, the owner of a small Mexican fast-food shop in Helena, says she plans to take advantage of it.

Hastings, whose business pays part of the cost of a health coverage plan for her two full-time employees, including herself, says she plans to add a full-time manager. The 35 percent credit could end up paying the business' share of his coverage, she says.

"It's just going to make it easier for me financially to provide it," she says. "It's really valuable to me, as I'm trying to hang on to a good employee in an industry where it is hard to keep them for a long time. Any opportunity for me to do that, I'm going to jump at it."

The credit is available to businesses that employ fewer than 25 "full-time equivalent" (FTE) employees whose average annual wages are less than $50,000. That's likely more than 90 percent of all private businesses in Montana, according to Labor Department statistics.


Yet the full 35 percent credit applies only to businesses that have 10 FTE or fewer, and average wages of $25,000 a year or less. The credit is reduced, or can be eliminated, for businesses with 10-24 workers and whose workers earn more than $25,000 a year.

Whether the credit is enough incentive for other businesses to shell out for the cost of covering employees remains to be seen, of course.

Officials with two prominent business lobbies, the Montana Chamber of Commerce and the National Federation of Independent Businesses, say the first step is informing their members on how the tax credit works.

"Most of them don't know very much about it," says Riley Johnson, state director for NFIB. "This is one of the problems with the bill itself … people just don't understand it. We have to bring our members up to speed."

Webb Brown, president of the Chamber of Commerce, echoes those comments, but also says he's hopeful the tax credit will encourage more small businesses to buy coverage for employees or keep coverage they already have.

"It's a start; we're glad there is some reform,"

he said.


Here's how the credit works:

• The business must offer a health insurance plan to its employees and pay at least half of the cost.

• The credit is a percentage of the costs paid by the business. For example, if the business pays 50 percent of the plan's cost at $50,000, the credit will be as much as 35 percent of $50,000. If the business pays a greater share or cost, the credit will be higher.

• The credit is reduced by a specific dollar amount if the business employs more than 10 FTE and the average wage of workers is more than $25,000. The Internal Revenue Service has a formula that calculates how much the full credit is reduced, depending on number of employees and their average pay. In some cases, the entire credit can be erased.

• Nonprofit small businesses also are eligible, but their credit is a maximum of only 25 percent of their share of health-plan costs.

The IRS has information on the tax credit on its front page of its website at

Brown says he expects the Chamber will mention the tax credit as it promotes its Montana Chamber Choices, a health insurance plan it offers for member businesses. About 1,500 companies are buying health insurance through the plan, covering 7,900 employees and another 8,000 of their dependents.

"I think (the new tax credit) will make a difference," he said. "It's certainly going to help people keep health insurance. It's not just for getting new coverage. … It'll help folks."