Healthcare Tax Credit for Small Businesses not as successful as predicted

President Obama’s Fiscal Year 2013 budget, released last week, contains a significant proposed expansion of the federal small business health insurance tax credit contained in PPACA with the hopes of making the program more appealing to American small businesses. 

The current program only applies to businesses with 25 or fewer employees and begins to phase out with more than 10 workers. It contains significant limitations, features a very complicated application process and generally does not yield businesses much tax relief. As a result, it hasn’t been too successful. Only 360,000 employers have claimed it so far, which is less than 10 percent of the 4.4 million potential recipients originally projected by the Obama administration.

The new proposal would expand program eligibility to small businesses of up to 50 employees and double the number of full-time workers that firms can have to receive the maximum credit to 20. The proposal also outlines a more generous phase-out and streamlines the process for receiving a credit. The administration projects these changes would result in an additional $14 billion in tax credits for more than 500,000 employers.

One key issue that the proposal does not address, though, is how a business will have to purchase coverage post-2014 to receive the credit. If you like what you have, you can’t keep it. Instead, to get the credit, small businesses will have to purchase their small group coverage through the SHOP exchange operating in their state.

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