Nearly 7,400 small businesses in Montana may qualify for a tax credit of up to 35 percent of the health insurance premium they pay for their employees under the new federal health care legislation, according to the latest issue of Montana Business Quarterly.
“For employers wanting to reduce the cost of providing health insurance, the tax credit should ease the burden somewhat,” said Gregg Davis, director of health care industry research at The University of Montana’s Bureau of Business and Economic Research. “But employers should recognize that in some instances, the qualifying premium could be reduced because of caps set by the U.S. Department of Health and Human Services.”
Davis co-wrote the article, “The New Health Care Law: Montana’s First Steps,” with Jerry Furniss, a professor in UM’s School of Business Administration.
For the full 35 percent tax credit, qualifying businesses must meet three criteria: They must employ fewer than 10 full-time-equivalent employees, pay average annual wages of less than $25,000 per employee, and pay at least 50 percent of the insurance premium.
However, Davis said, limitations on the premium amount that can be applied to the credit could reduce the attractiveness of the tax credit for some employers. The average premium for a family policy in Montana is $11,438, with employers paying about 67 percent of that premium, or $7,615.
The qualifying premium used for the tax credit is the lesser of 67 percent of the average family premium ― as determined by DHHS ― or 67 percent of the actual premium paid by the employer, Davis said. DHHS has determined the average family premium for Montana is $10,212, so the employer is limited to $6,842 for the qualifying premium, well below the actual $7,615 paid for health insurance premiums.
“For an employer with, say, nine full-time employees with annual average wages below $25,000, the employer’s cost of providing health care insurance to employees is almost $70,000 per year, but the qualifying premium is limited to just under $62,000, reducing the tax credit from $24,500 to $21,552,” Davis said. “In effect, this reduces the credit for providing insurance from 35 percent to 31 percent. So although it appears this employer qualifies for the full 35 percent tax credit, the effective tax credit is only 31 percent of the full cost of providing coverage to their employees.”
In 2014, the credit increases to 50 percent of qualifying premiums and phases out after two years, according to the legislation.
“Small employers in Montana who do offer insurance still receive some relief from the financial burden of providing insurance, but the relief may be smaller than expected,” Davis said. “After the tax credits phase out completely, how small employers respond may depend more on what their competitors are doing in terms of insurance and have less to do with the cost of providing it.”
Currently, small businesses are not required to offer health insurance to employees, Davis said. For larger businesses with more than 50 employees, 2014 is a landmark year. Employers that do not offer coverage, offer minimum essential coverage that is unaffordable or offer a plan that has an actuarial value of less than 60 percent are required to pay a penalty if any of their employees receive a premium or cost-sharing reduction in the exchange, he said. Also in 2014, employers with more than 200 employees must automatically enroll their employees in health insurance plans sponsored by the employer.
Other important health care provisions discussed in the Montana Business Quarterly article include the future elimination of the Medicare Part D “donut hole,” the creation of a state high-risk pool for individuals with pre-existing conditions who have been without health care insurance for at least six months, and the extension of health insurance coverage for dependents up to age 26.
“For Montana, health care reform is particularly important,” Davis said. “Our state devotes nearly 9 percent of its gross state product to health care, a proportion that is exceeded in only eight other states. Success of the new reform will be measured incrementally for years to come as different components of the law become reality.”
Montana Business Quarterly is published by the BBER and is partially supported by Missoula Federal Credit Union. Annual subscriptions are available for $35. For more information or to subscribe, call 406-243-5113 or go to http://www.bber.umt.edu.
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