Bev and Dick Hagadorn spend $140,000 a year to provide health benefits for their hair salon employees. They are ineligible for the health care tax credit, though, because they employ too many people.
NEW YORK (CNNMoney) -- The health reform passed last year included tax credits to help ease the burden of surging health care costs for small businesses. But many small firms are ineligible.
Four million small businesses would qualify for the credit if they provide health insurance to their employees, estimates the White House Council of Economic Advisors. Of those, only 30% -- or about 1.2 million businesses -- would be eligible for the full tax credit, according to research from the Families USA and the Small Business Majority. Only the smallest companies will qualify for the maximum amount.
The tax credit refunds small businesses for a portion of the money they spend on health care premiums. However, the size of the business and the average salary can disqualify a business.
Therefore, a lot of small businesses that are struggling with the growing expense of providing their employees with health insurance don't qualify.
"We feel like we are in a doughnut hole," said Bev Hagadorn, who owns 11 Great Clips salons in the Las Vegas area with her husband, Dick. "We are a small business, but the law -- as we understand it -- doesn't treat us like a small, family-owned business," said Dick.
Although, they pay for employee benefits, they are ineligible for the tax credit. Their staff is too big, according to the reform law.
Bev and Dick bought their first franchise 12 years ago. They have 110 employees. Almost all of their employees work full-time. The Hagadorns offer health insurance, dental, vision, a retirement plan, and a week of vacation every six months. Managers get three weeks of vacation a year.
Benefits cost the couple about $140,000 a year and that will increase between 5% and 10% yearly.
Recently, they have had to ask employees to contribute a bit more. The Hagadorns used to pay 100% of the health care costs for their managers, but they now pay 90%.
The requirements for the tax credit: Small businesses that pay at least half of their employee's health coverage can get a significant tax refund. In what the White House claims is "broad eligibility," the maximum credit goes to businesses with 10 or fewer full-time employees with annual average wages of $25,000 or less. Companies with the equivalent of 25 full-time employees or more (the hours worked by part-timers count) or employees with annual average salaries of $50,000 or more are out of luck.
From 2010 to 2013, the tax credit is worth up to 35% of the money that a qualifying business spends on its health insurance premiums. In 2014, businesses can get a maximum of 50% of what they spend on premiums for their employees. The credit is available for a maximum of six years: 2010 through 2013 and for any two years after that.
The White House says the tax credit is doing exactly what it is supposed to do. "The tax credits were designed and targeted to the smallest businesses that often have the most difficulty offering insurance to their workers," said an administration official.
But that is of little consolation to those firms that don't qualify. "There are not too many businesses that have 25 or fewer employees -- probably real estate agents, maybe doctor offices -- but if you are a real small business, you are going to employ people," said Dick.
Sam Kumar, the owner of MYCO Medical in Cary, N.C., won't qualify for the health care tax credit, either. He only has 22 employees, but the average salary of his employees is $62,000.
Kumar spends about $60,000 a year providing health care for his employees. He pays 100% of the health care premiums for his employees and a generous suite of benefits. "And despite the fact that we have very healthy employees, our costs went up 27%," he said.
Back in 1993 when Kumar started the company with $5,000 from his 401(k), he wasn't able to pay for benefits. But now he has been able to pick up the cost for the past three years. As his business grows, he must continue to offer benefits to stay competitive.
The tax credit would help him hire.
"Right now, I have plans to hire one more person by the end of the year," said Kumar. "That could potentially be easier and could be larger had I some kind of assistance."
"Waiting for a referee": Indeed. Rising health care costs and uncertainty about the health reform getting fully implemented have been stumbling blocks to many small business owners hiring.
For now, the Hagadorns are sitting on expansion plans. The couple has submitted applications for another six Great Clips locations and paid the down payment on those agreements. But they have yet to sign any leases with landlords.
They are still trying to figure out what the health care reform will mean for them.
"Every other sentence is if-then-but-however-and-maybe," said Dick. "And then they haven't figured this out yet. They haven't decided that yet. It is just noodle soup."
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