New Tax Break For Health Care Gets Mixed Review

The Obama administration Monday unveiled a tax cut for small companies that provide health insurance, but business groups gave it a mixed review.

Even if it amounts to free money, many small businesses won't qualify for the tax credit.

The full benefit goes to companies that have 10 or fewer workers with average salaries of $25,000 or less. They can get Uncle Sam to pick up 35 percent of their premiums. But sole proprietors aren't eligible. And neither are firms with 25 or more employees, or average wages of $50,000 and above.

"We're thinking mom-and-pop shops with one or two employees," said James Gelfand, the U.S. Chamber of Commerce's health policy director. "For some businesses this will be helpful, but for many it will not be helpful. You have to be so small that it will be difficult."

CBSNews.com Special Report: Health Care

Administration officials said they're trying to target assistance to those who need it most. "The Number 1 concern of small businesses is access to affordable health care," said Small Business Administration head Karen Mills, noting that only about half of businesses with three to ten employees offer coverage.

"People know this means money in their pockets," Mills added.

The major expansion of coverage under President Barack Obama's health care overhaul law isn't slated to happen until 2014. Congress included the small business tax credit as an immediate benefit partly in recognition of the political clout of small business.

Nonetheless, small business owners remain skeptical of the law. Last week the National Federation of Independent Business joined a court challenge seeking to overturn its requirement that most Americans obtain health insurance coverage.

IRS rules issued Monday resolved a range of questions about the tax credit that Congress didn't address. The agency generally worked to expand the number of companies that can qualify for the benefit.

For example, dental and vision benefits will be eligible, not just medical coverage. And companies that get state tax breaks to help pay premiums can also claim the federal assistance. Moreover, business owners' salaries won't be counted in figuring out the company's average wages - allowing more firms to stay under the cutoff for the federal credit.

Nonprofits - including churches and other religious congregations - will also be allowed to claim a partial credit.

The administration estimates that 4 million businesses are potentially eligible for the credit, but the NFIB says its own experts calculate the number is less than half that, about 1.8 million.

"It's difficult to know how many business owners will take this up, at this point," acknowledged Michael Mundaca, head of Treasury's tax policy office. "It can provide a good deal of incentive for those businesses not yet providing health care to take steps to do so."

Others expect the credit will mainly benefit companies that already provide coverage. Part of the reason is that it's temporary, expiring after six years.

"It's hard to imagine businesses creating health care benefits in response to this credit," said Gelfand, the Chamber of Commerce expert. "It's much more likely that this credit will offset the cost to businesses already providing coverage."

John Arensmeyer, head of the advocacy group Small Business Majority, said business owners have expressed strong interest in learning more about the credit. The IRS sent out 4 million postcards to companies that might be eligible.

"Would we have preferred a tax cut that was a lot bigger? Off course," said Arensmeyer, whose group supported the health care overhaul. "But we think it's a lot better than nothing - and a big piece of an overall solution. I never met a small business owner who turned their nose up at a tax credit."