Should Small Business Care About “ObamaCare”?

Entrepreneurs, by definition, are often those individuals that do things differently. They often change the rules of the market. They often change the rules of product or service-design. They are tired of rules set out by the marketplace or competitors. However, often playing by the rules can work to one’s advantage, if you know what those rules are. “ObamaCare” (The Patient Protection and Affordable Care Act), or ACA, changed the rules. Use those rules to your advantage.

Regardless of your opinion of whether or not the new health care bill goes far enough, or too far, it established a new playing field. So let’s play. One of the immediate side-effects of ACA is tax credits for small business. With a lot of small businesses not offering health care to their employees, the intent was to establish legislation that created a tax credit program to encourage small businesses to do more. The key question to those small businesses that haven’t offered health care in the past is whether or not the tax credit is incentive enough to start offering it. That is a unique business decision for each entrepreneur.

Know the rules. First, a company with fewer than 25 employees and average wages below $50,000 must pay at least 50% of their employees’ health care premiums. When that standard is met, the tax credit amount is up to 35% of the employer’s contribution to those premiums in 2010. The full 35% tax credit is currently available for companies with fewer than 10 full-time employees and an average wage of $25,000. In 2014, the maximum credit amount increases to 50% of the employer’s contribution. The kicker, those credits STOP in 2016! In other words, the tax credit plan evolves over the next six years…then disappears. Nothing like sound and stable healthcare policy that helps small business owners to make long-term plans (feel the sarcasm).

The ACA debate centered on encouraging small business owners to offer affordable healthcare to their employees, even if the employer was not in a healthy (pun intended) bargaining position to purchase it (as large employers often are). Often times, small businesses could not afford to offer health care to their employees because it simply cost more than it does for larger companies. This is primarily due to higher administrative costs, insurance broker commissions, overhead costs of the insurance company, etc. The Commonwealth Fund determined, that on average, small companies pay up to 18% more in premiums than do large companies for the same coverage.

While the ACA tax credit program may seem short-sighted, one aspect of the new health care law that will have a larger impact on small business and entrepreneurs has to do with state health care exchanges that will begin to pop-up in 2014. States will control the parameters of these exchanges but by 2016 they must be open to small businesses with up to 100 workers. The state exchanges will provide rules for out-of-pocket costs and deductibles. The appeal of the exchanges will be that small businesses won’t necessarily have to be in a power position to negotiate premiums since the exchanges will spread the risk , “risk-pooling”, across more people while being able to minimize overhead.

While the ACA encourages more small businesses to offer health care through tax credits and state health insurance exchanges one thing to realize is what it does to “large” businesses. Companies with more than 50 employees (full-time equivalents) that do NOT offer health insurance can be required to pay $2,000 per employee (excluding the first 30 employees) based on a formula that considers their income and whether the employee’s premium contribution would exceed 9.5% of their income.

It is becoming more and more important as our economy struggles along for entrepreneurs to be aware of how the rules are changing…and how to apply them to their specific small business. There are a variety of efforts underway, at the national and state levels, which are meant to encourage small businesses to grow, buy equipment, and hire employees. Today, nearly everyone accepts that is it small business that impacts the overall economy, as well as their community. Like it or not, the government is getting involved.