Why Our Smallest Businesses are Passing on Obamacare

At Least One Goal of Obamacare Not Being Met

Man walking by Obamacare center in Florida
Florida Residents Sign Up For Affordable Care Act on Deadline Day. Joe Raedle / Getty Images

One of the basic goals of Obamacare – getting America’s smallest businesses to provide health insurance for their employees – just isn’t happening, according to a federal government audit.

Background: The Obamacare Small Business Tax Credit

Under the Affordable Care Act of 2010, better known as “Obamacare,” businesses with fewer than 50 full-time equivalent employees are not required to provide health insurance to their employees, as larger businesses are.

However, in an attempt to entice businesses with fewer than 25 full-time equivalent employees to provide health insurance to their employees Obamacare offers a Small Business Tax Credit to help small businesses afford the cost of health care coverage for their employees.

The Obamacare Small Business Tax Credit targets and most benefits those small businesses that employ predominately low- and moderate-income workers.

To qualify for the tax credit, employers must have fewer than 25 full-time equivalent employees with average annual wages below $50,000, and pay an average of 50% of their employees’ health insurance premiums.

Employees of very small businesses that simply cannot afford to provide employee health coverage make up one of the nation’s most often non-insured groups. 

Achieving the overarching goal used to justify Obamacare in the first place, making sure every American has health insurance, depends heavily on these small businesses providing insurance for their employees.

The Small Business Tax Credit is supposed to offer them incentive to do so.

But Small Business Is Not Buying It

According to an audit conducted by the Government Accountability Office (GAO) in 2016, the number of eligible small businesses taking advantage of the Obamacare Small Business Tax Credit has been disappointing.

In 2010, the first year of Obamacare, 188,303 employers claimed the tax credit. By 2014 that number had dropped to 181,004. Both totals are shockingly low, considering that a 2012 GAO estimate placed the number of employers eligible to claim the tax credit at from 1.4 million to 4 million.

In 2010, value of approved Obamacare Small Business tax credits totaled about $468 million compared to initial estimates of $2 billion by the Congressional Budget Office (CBO) and the Joint Committee on Taxation. By 2014, approved claims for the credit had increased only slightly, to around $541 million, still far short of the Obama administration’s target of more than $2 billion.

Why Don’t Small Employers Provide Health Insurance?

According to the GAO, Obamacare has some tall hurdles to jump in order to convince small employers to offer a health insurance benefit. Specifically, small employers have historically chosen not to offer health insurance because:

  • Providing health coverage to very low-wage employees greatly increases the employers’ total compensation costs. Such “optional” costs are often make-or-break issues for very small businesses.
  • Low-wage employees typically prefer – and often need – higher pay over benefits. Faced with the increasing operating costs of providing health insurance, many small employers are forced to reduce wages, lay off employees or both. While employees pay income and employment taxes on wages, employees do not pay these taxes on premiums that employers pay for health insurance. However, due to being in lower income tax brackets, income tax exclusions are worth less to low-wage employees compared to those with higher wages.
  • Insurers of small employers face higher-average fixed costs for billing and marketing and are less able to pool risk across many employees.

Why Isn’t the Obamacare Tax Credit Changing That?

So, what’s wrong with the Obamacare tax credit for very small businesses? According to the GAO’s audit, there are several reasons employers are not claiming the credit.

  • The maximum amount of the tax credit simply isn’t large enough to get employers to offer or maintain health insurance.
  • In fact, very few small employers even qualify for the maximum credit amount.
  • For employers who do claim the tax credit, the amount of the credit “phases out” or reduces to zero as the employers increase the average annual wages of their full time equivalent employees. In a classic “Catch 22” situation, the low-wage employees need higher wages and health insurance, but under the rules of the Obamacare tax credit employers can’t afford to give them both.
  • The amount of the credit is also limited if premiums paid by an employer are more than the average premiums for the small group market in the employer's state.
  • The Obamacare tax credit can only be claimed for two consecutive years.
  • As with many other federal tax credit programs, the GAO found that the significant cost and complexity involved in claiming the tax credit prevented many small employers from claiming it.
  • Last but far from least, many small businesses told the GAO they simply did not know the tax credit existed. This despite the fact that since 2010 the IRS has been working to raise awareness about the credit and reduce the burden on taxpayers by offering tools to help taxpayers determine eligibility for the credit.

Can the Tax Credit Be Fixed?

As the GAO reported, both Congress and the Obama administration have proposed changes to the tax credit to make it more attractive to small employers. These include:

  • Increasing the maximum number of eligible full time equivalent employees.
  • Altering or eliminating the “phase out” rules, thus allowing employers to raise wages without losing the tax credit.
  • Allowing employers to claim the tax credit for more than two consecutive years.

However, as the GAO pointed out, those changes would increase the cost of the Obamacare to the government, and thus to taxpayers.

A Good Idea Poorly Planned

In concluding its report, the GAO noted that while the Obamacare Small Employer Health Insurance Tax Credit was created to accomplish the very good goal of offer an incentive for small, low-wage employers to provide health insurance, the use of the credit had been far lower than expected “with the available evidence suggesting that the design of the credit is a large part of the reason why.”