Healthcare: What Small-Business Owners Need to Know
by Matthew Bandyk
In the battle to pass some form of healthcare reform, small business is a major player. Earlier this year, Congress proposed reform bills that would put in place heavy fines on businesses that fail to provide healthcare for their employees, with the exception of those that have just a few employees. Small-business political associations in Washington quickly denounced these provisions as too burdensome for too many businesses.
Now, what's on the table for healthcare reform has changed. In early September, the Senate Finance Committee put forth a new healthcare bill that removes those penalties on businesses. Instead, it offers carrots to employers that provide healthcare, while keeping a few sticks. The bill, associated with its main sponsor, Democratic Sen. Max Baucus of Montana, seeks to expand insurance coverage through the creation of nonprofit insurance exchanges at the state level. These exchanges, under recent amendments Baucus accepted, will be open to small businesses with up to 100 employees.
Although the Senate is currently debating numerous amendments to the bill, many of the most relevant pieces that apply to small business don't seem to be points of contention. One thing is for sure: Many elements of the bill will have a profound impact on how employers seek out and pay for insurance for their employees.
Here are, from the perspective of small-business owners, some of the most important pieces of the current plan to reform healthcare.
The new carrots in the bill are in the form of tax credits for employers that provide their employees health insurance. But not every employer can cash in on these incentives. Only businesses with 25 or fewer employees would qualify. However, about 92 percent of small businesses with employees fall into this category, according to the SBA. There's one further qualification: The average wage of all of the business's employees must be no greater than $40,000. Most business owners will want to pay attention to how much these credits could save them, and when.
In 2011 and 2012, the bill would allow employers to deduct from their taxes an amount equal to the dollar amount the employer contributes for each employee's coverage, multiplied by a certain percentage. This percentage would be based on the amount of the employee's total premium contributed by the employer, or the average premium in the employer's state. Starting in 2013, the state insurance exchanges kick in, and the credit applies only to businesses that purchase insurance through those exchanges.
So would these write-offs revolutionize the way small businesses provide employee healthcare? Bill Rys, tax counsel for the National Federation of Independent Businesses, says expectations shouldn't be too high. The size and length of the credit--just four years--aren't high enough for businesses that are strapped for cash to suddenly consider buying healthcare. But the credit could make a difference for business owners "on the cusp"--those unsure if they can afford employee coverage. "It does provide some immediate cost relief," he says. The relief is especially large for the smallest businesses. Businesses with fewer than 10 employees and less than $20,000 in average wages get to keep the tax credit in full. For larger businesses, it begins to phase out starting in 2013.
But there are also some potential problems. If a business owner starts paying employees more and the average wage surpasses the $40,000 mark, the business could no longer be eligible for the credit. That wage requirement could make employers reluctant to give out raises. Rys says that this is a real concern, but he's not too worried. There isn't much incentive for employers to keep average wages down for the same reason that the tax credits won't have small businesses rushing out to buy health insurance. The length of the credits is just too short. "The concern would be greater if the credit were longer, but the credit is for only two years before the exchange starts," Rys says.
Although no employer will be automatically punished for not providing coverage, there are still some fines in the bill that apply to firms with 50 or more employees--only 4 percent of all businesses that hire. But for businesses included in that 4 percent, the tax penalties can be hefty. That's because the bill provides subsidies for individuals and families who make up to 300 percent of the federal poverty level to help them buy insurance through the state health exchanges. Employers that don't provide coverage will have to pay a tax penalty for each employee who receives these subsidies. This has been dubbed the "free rider" provision because it is intended to deter employers from "free riding" off the new health insurance exchanges.
The penalty is either the average cost of subsidies that year multiplied by the number of employees receiving subsidies or $400 per employee--whichever number is lower. But business owners won't be told what they owe. They'll have to crunch the numbers themselves to determine if they owe the full amount or the minimum, says Judith Solomon, senior fellow at the Center on Budget and Policy Priorities. There are many administrative burdens that could come with this provision. For example, a business owner would have to keep track of which employees qualify for subsidies, if they suddenly become qualified, or if they drop out of the exchange altogether. Some business that want to avoid the penalty can expect disputes with the tax man--it will be up to them to inform the IRS that some former employees who received health insurance subsidies were laid off or no longer work there, says Solomon.
Another complicating factor of the "free rider" provision for employers is that it might make them think twice about whom they hire. "It does distort the hiring decisions in the direction of employers who don't need coverage," says Solomon. A business owner might be inclined to look for potential employees who already get health insurance through their spouse, for example, in order to avoid dealing with the tax penalty. Choosing to hire or not hire someone on that basis could land a business owner in legal trouble.
One of the most controversial aspects of the Baucus bill is that, if passed, it would be partially funded by an excise tax on health insurance companies. In 2013, a 35 percent tax would kick in on insurance policies in which premiums are above $8,000 for single people and above $21,000 for families. It might not seem as if a tax on insurance companies would have much to do with small businesses, especially considering that few small businesses have the type of gold-plated, "Cadillac" health insurance plans to which the tax applies. But Keith Ashmus, the chair of the National Small Business Association, says these taxes could be passed down to all employer health insurance plans--not just the gold-plated ones--in the form of higher premiums. "The tax will be part of the entire cost structure of the insurer," he says. "[So] the trigger will be a high-cost plan by company Y, but the impact will be felt by everyone."
The good news is that as the Senate has negotiated aspects of the bill this week, Baucus appears to be willing to ease the impact of the excise tax--but not eliminate it.
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