Small businesses are the backbone of America’s economy. Across the country, there are nearly 4.8 million businesses that employ 25 or fewer workers. They’re your local diner, the hardware store down the street, and the mechanic in your neighborhood.
While small businesses have been serving us, however, our health care system has been failing them, making it difficult—if not impossible—to provide their workers with quality, affordable health coverage. Particularly for the smallest businesses, the cost of providing health insurance can be prohibitively expensive, especially in these tough economic times. Health care costs are daunting for everyone, but they are even more out of reach for small businesses: In 2008, employers with fewer than 10 workers paid $350 more for each employee’s health insurance, on average, than firms with 50 or more workers. And the coverage they got for that extra $350 may not have been as comprehensive as what a larger employer got for a lower price.
The result is that, the smaller the business, the less likely it is to be able to insure its workers. In 2009, less than half (46 percent) of businesses that employed three to nine workers offered coverage to their employees. Among small businesses with 10 to 24 workers, the offer rate increased to 72 percent, while almost all businesses with 50 or more workers (more than 95 percent) offered coverage to their employees.
In the Patient Protection and Affordable Care Act, Congress and the President recognized that small businesses, particularly those with 10 or fewer workers, struggle to provide health insurance for their workers, and that some cannot afford to provide it at all. Legislators therefore included many provisions in the law to help small employers and their workers obtain high-quality, affordable coverage. One of these important provisions is a program to provide tax credits that small employers can use toward the purchase of health insurance for their workers.
Starting this year, businesses with fewer than 25 workers and average wages of less than $50,000 will be eligible to receive a tax credit for the health insurance that they provide for their employees. The value of the credit this year (and until 2014) is up to 35 percent of the employer’s costs for employee coverage (and up to 25 percent of the costs for nonprofit employers). The smallest firms with the lowest wages—those that employ 10 or fewer workers who earn an average wage of less than $25,000—are eligible for the full 35 percent tax credit (or 25 percent for nonprofits). From there, the size of the credit will phase out on a sliding scale. Congress designed this system with the intent of providing the greatest help to those businesses most in need—the smallest employers who face the highest premiums and are the least able to offer coverage to their workers.
For this study, Families USA and Small Business Majority commissioned The Lewin Group to analyze data on business sizes and wages from the U.S. Agency for Health Care Research and Quality and the U.S. Census Bureau in order to quantify the number of employers who will be eligible to receive help from this provision. Lewin was then asked to use its Health Benefits Simulation Model to quantify the number of employers who will be eligible for the maximum tax credit.
State-specific reports are also available for California, Missouri, and New York.