Few Colorado businesses use health insurance tax credit
An estimated 82,000 companies could qualify

John Crandall, owner of the Old Town Bike Shop in Colorado Springs, advises customer Gayle Allen. Crandall found taking the tax credit for health insurance for his employees easy, but he’s in the minority among other business owners across Colorado. Credit: Ann Imse/Colorado Public News

By Erika Gonzalez
Colorado Public News

(Jump to audio version)

When small business owner John Crandall learned two years ago that his Colorado Springs bike shop qualified for a new health care tax credit, he jumped to take advantage of it.

Providing health insurance helps his Old Time Bike Shop retain good employees, Crandall said. He covers half the premiums for five of the eight full-time workers who have opted into his plan, and splits the savings from the tax credit with them. Last year, the credit reduced monthly premiums by $31 per employee.

“I don’t see why anyone would not do this,” Crandall said.

But Crandall is more the exception than the rule. A lack of awareness and complex rules dictating who may receive the credit may be keeping more small businesses from taking the credit.

Just 5 percent of Colorado businesses that qualify for the tax credit are using it, according to a recent survey by Kaiser Permanente. Families USA, a group that promotes affordable health care, estimated 82,000 small businesses in Colorado could be collecting this money in total.

The tax credit is part of the Affordable Care Act, the controversial health care law that is now phasing into effect. It is meant to encourage small businesses and nonprofits with low average wages to provide health insurance to their employees. The law provides a tax credit for up to 35 percent of the insurance premiums now, growing to 50 percent in 2014.

“Small businesses don’t know about it. With all the political rhetoric going around about the ACA, folks weren’t focused on learning about it,” said Rhett Buttle, a spokesman for the Small Business Majority, a business group that supports the ACA. His group offers an online calculator for estimating whether an employer will qualify for the tax credit.

Kaiser’s survey showed that of the Colorado businesses that were eligible for the credit, more than half – 56 percent – said they didn’t know about it.

Although the Internal Revenue Service did mail postcards to employers and established a website to educate potential claimants, industry resources such as insurance brokers and accountants still may not understand how the credit works.

The Colorado Society of Certified Public Accountants, for example, said it has not provided any seminars specifically on the credit, but will cover the topic in an upcoming member newsletter and in general tax training.

Small business owners who do their own taxes may have missed the credit, because tax software such as Turbo Tax and Quicken did not immediately include it. Current versions do.

But a bigger issue, say some observers, is that few businesses actually qualify for the credit’s maximum amount, making it less attractive to spend the time and sometimes money needed to claim the credit.

“The credit is loaded with requirements that most employers are already above the levels of, such as average wage base,” said Tony Gagliardi, Colorado state director of the National Federation of Independent Business, which has long opposed the health care law and continues to lobby for its repeal. “In the beginning of the debate of Obamacare, NFIB research determined that less than 12 percent of small businesses would be eligible for any portion of the tax credit. Later estimates have reduced that number down to 8 percent.”

Gagliardi said he hadn’t heard of any members of his organization who had taken advantage of the credit, mainly because few qualify.

“We don’t even try to compute it,” said Denver-area accountant Harlan Rubottom. “As nearly as we can tell, there is generally no one who would qualify for it. And the time (and therefore the fee) involved is prohibitive.”

Although the IRS offers a simple three-step guide to help businesses determine if they qualify for the credit, the instructions to apply are eight pages long.

To obtain the credit, a small business must have fewer than 25 full-time employees, pay average annual wages below $50,000 per full-time employee, and contribute at least 50 percent to each employee’s premium. Business owners and their families don’t qualify.

It’s also tough to get the full amount. Businesses with 10 full time employees who earn less than $25,000 in average wages qualify for the maximum credit. But having more employees reduces the tax credit. So does paying them more.

For example, a company with 15 employees and an average wage of $30,000 may receive a 16 percent credit.

Premiums paid by an employer can’t exceed the state average for small companies, as determined by the government. In Colorado, that’s $5,007 for a single person and $12,258 for a family this year.

In a recent study, the U.S. Government Accountability Office found that only 170,300 small employers claimed the credit in 2010, of up to 4 million eligible. The GAO blamed complex rules and the fact that many small businesses with such low wages don’t offer health insurance.

“We have hundreds of companies we work with, and we don’t have a lot that offer benefits for people who are making $10 to $12 an hour,” said Tim Hebert, managing partner of Fort Collins-based Sage Benefit Advisors, a health insurance broker.

Arvada accountant Mike Franca said businesses that pay low wages often have low profits. “There’s probably not a lot of margin in there to pay these additional costs for the health premiums,” he said. Employers also are not sufficiently concerned about low-wage, low-skilled staff leaving that they will offer health insurance to keep them, he said.

The recession is another factor. Jack Renfroe, owner of Foundation Builders in Greeley, has cut his staff from 90 to 30 and eliminated his own paycheck as the construction industry has shrunk. “If I can get the business going again, and I could afford the health care, I’d love to give it to them again,” he said. “We had it before and we had to drop it, because the cost for a family was going over $1,000 a month.”

Hebert says that he knows of a few companies that were on the fence about offering insurance and did move forward, thanks to the credit. But by and large, data shows that the credit hasn’t incentivized large numbers of small employers to offer health insurance. (Seventy-one percent of firms with 10 to 24 workers provided health insurance in 2011, down from 77 percent a decade earlier, according to the Kaiser Family Foundation).

Crandall, the bike shop owner who found the process of applying for the credit relatively easy, was already offering insurance to his employees before taking the credit. But he wishes more companies – particularly those with higher numbers of uninsured employees – could qualify for it

That could happen under changes proposed by President Barack Obama that would expand the credit to companies with 50 employees. The changes also would allow businesses with more staffers to collect the maximum credit, and eliminate the limits tied to state average premiums. The maximum tax credit available will also rise to 50 percent in 2014, but businesses must purchase coverage through the soon-to-established health insurance exchanges in order to apply.

Crandall acknowledges that politics could continue to limit adoption of the credit, particularly in a conservative community such as Colorado Springs.

“Even people who could benefit from it, just the fact that it has anything to do with the government will cause some not to take advantage of it,” he said.

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