The new health care reform law, officially known as the “Patient Protection and Affordable Care Act” was signed into law by President Obama on March 23, 2010. The media, not all of whom are friendly to this legislation, often refer to the new health law as “ObamaCare”. Many of the negative media comments concentrate on the fact that this bill contains over $400 billion in new taxes on individuals and businesses.
This complex Act runs to over 1,400 pages. In this analysis, we will attempt to gauge the effect of the Health Care Reform Act on small and medium-sized businesses. We will not try to cover all the points as they relate to small business: there are just too many for a short report. We will however take a look at the Act’s principal provisions.
The Act provides for an employer tax credit for small businesses: If you have 25 or fewer employees and a full-time work force with average wages of less than $40,000, you can get tax credits to help buy health insurance: up to 35 percent of the cost of the premiums this year, rising to 50 percent in 2014. This tax credit is effective if you (the employer) contribute at least 50% of the total health insurance premiums. This tax credit runs from the present (2010) through 2013. Beginning in 2014, small businesses that purchase health insurance for their employees through state health insurance exchanges can receive a two-year small business tax credit of up to 50% of the cost of the premiums.
For tax-exempt (not for profit) organizations there is a 25% tax credit. It is not clear how this would work for organizations that do not pay taxes .
Penalties – Starting in 2014, if you have 50 or more employees and do not provide minimum essential health insurance (not yet defined) you will be charged a non-deductible fee. This fee will equal $2,000 times the number of your employees, but it won’t count the first 30 workers in that calculation. As an example, if you have 75 employees and do not provide coverage, you will a pay the penalty for 45 workers, or $90,000 (45 x $2,000). Employers with 50 or fewer employees are exempt from penalties.
It appears that there are no restrictions on the types of plans an employer may offer and the cost-sharing arrangements between a company and its employees.
Penalty if Employer Offers Coverage But Employee Receives a Tax Credit An employer offering “minimum essential coverage” may nevertheless have an employee who chooses to obtain subsidized coverage through an exchange (see below). An employer may face a penalty of up to $3,000 for each such individual. This appears to be an effort to ensure that employers subsidize coverage sufficiently to keep such individuals in the employer’s plan rather than in the federally subsidized individual market.
It is important to note that these penalties are indexed for inflation.
Employee W-2’s Beginning in 2011 there is a requirement that businesses include the value of the health care benefits they provide to employees on W-2s.
State Run Exchanges Small Business Health Option Programs (“SHOP”) Beginning in 2014, health insurance will be available to individuals and small businesses through state-run “exchanges.” These will require insurance companies to compete for business in a marketplace. The objective is to make it easier for individuals and small businesses to obtain health insurance at a lower price.
The exchange program for small businesses, known as the “Small Business Health Options Program” (SHOP), will allow small businesses to pool together to increase their purchasing power. This will allow these businesses to offer health insurance to their employees at rates similar to those available to large corporations.
SHOP is available to small businesses with up to 100 employees, although states have the option to limit participation to businesses with 50 employees or less until 2016. If a business participating in SHOP grows to over 100 employees, it may continue to take advantage of the program. Beginning in 2017, states may opt to allow businesses with more than 100 employees to participate in SHOP as well.
Pre-existing Conditions – Starting six months after the enactment of the Health reform Bill, insurance companies will no longer be able to deny children coverage based on a pre-existing condition. Beginning in 2014, insurance companies will not be able to deny coverage to anyone with pre-existing conditions. As a small business employer, your entire work-force will be eligible for coverage in 2014 no matter the physical condition of any of your employees.
The Administration has stated that the Health Care Act provides the following Benefits for small Businesses
• End of Price Discrimination Based on Illness: Health reform will end price discrimination. Starting in 2014, “community rating” rules will prohibit insurers from charging more to cover small businesses with sicker workers or raising rates when someone gets sick.
• Health Security Empowers Entrepreneurship: By providing health security for every American and eliminating exclusions for pre-existing conditions and price discrimination against those who are sick, health reform will make it easier for small businesses to attract the best workers and easier for entrepreneurs to strike out on their own.
• Reduce Hidden Tax by Dramatically Expanding Coverage: Health reform will significantly reduce this tax by covering an additional 32 million Americans by 2019.
• Health Reform Will Lower Costs, Making Coverage More Affordable: Taken together, the measures described above will significantly reduce premiums for small businesses. According to CBO, health reform will reduce the cost of a given plan in the small group market by 1-4 percent by 2016.
However, the one area that might prove to be a major issue for small and medium-sized businesses is the “Penalties” provision (see above). The Act establishes a strong disincentive to expand employment, particularly for firms looking to grow beyond the threshold of 50 workers per firm. For many companies in the U.S., the marginal cost may be great enough to forgo hiring additional workers. This would be counterproductive to the Administration’s job creation initiatives.
Alan J. Rude