Health Reform & Small Business – Kogod Now
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Kogod Now / Fall 2011  / Health Reform & Small Business
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Health Reform & Small Business

In the fierce debate over health-care reform, much lip service has been paid to the escalating cost of health insurance. But few are hit harder by rising premiums than small-business owners. Frequently operating on paper-thin profit margins, many Main Street businesses fight month-to-month simply to make payroll.

“For many of them, offering employees health insurance is simply not a realistic option,” said Dave Kautter, managing director of the Kogod Tax Center. The Center—a research institute focused on the specific needs of small businesses, entrepreneurs, and middle-income taxpayers—has been taking a closer look at the potential impact of the Patient Protection and Affordable Care Act, the massive health-care reform law passed last year.

The Act specifically exempts small businesses with fewer than 50 employees from any employer requirements to provide coverage, simply because the costs would be too burdensome.

Despite ongoing partisan dissent about the legislation, one critical fact remains clear: with small businesses employing half of all US workers and creating two of every three new jobs, millions of Americans will remain uninsured until small businesses can afford the cost of health coverage.

Until costs come down, small-business owners must work within the limits of the current private insurance marketplace, where they are at a major disadvantage. Fewer coverage options and administrative costs make buying health insurance significantly more expensive for small firms. On average, they pay up to 18 percent more in premiums for a similar plan purchased by a larger employer, according to the White House Council of Economic Advisors.

As a result, those employed by small businesses and their families are far more likely to be uninsured or severely underinsured. The Council of Economic Advisors reports that only 49 percent of small businesses with three to nine employees and 78 percent of small businesses with 10 to 24 employees offered any health insurance plan in 2008.

To help small employers cover the cost of premiums, the Affordable Care Act created a new Small Business Health Care Tax Credit. Starting in 2010, businesses with fewer than 25 full-time workers that pay at least half of their employees’ health insurance premiums are eligible for a credit of up to 35 percent of those costs.

“The credit is designed to help small employers cover the costs of their contributions to employee premiums, which have risen exponentially over the years,” explained Don Williamson, executive director of the Kogod Tax Center. “While it is limited to extremely small employers—those with fewer than 25 employees—it should provide those who qualify with some tax savings as early as this year.”

Real World Scenarios

To illustrate the full impact of the credit, Williamson and Kautter created three hypothetical business scenarios and determined how each organization would benefit.

“Our examples reveal that this credit can substantially benefit a range of small businesses—from restaurants to professional service firms to charitable nonprofits—that already offer their employees health insurance,” explained Kautter.

“But it’s crucial to note that the bulk of the benefit goes to businesses that are extremely small, with fewer than 10 employees,” Kautter added. “And it does little to help small businesses that cannot yet afford coverage.”


According to estimates from the Congressional Budget Office (CBO), the credit could reduce tax payments for eligible small employers by $40 billion between 2010 and 2019, and reduce their premiums by 8 percent to 11 percent of payroll.

How much savings the credit will really provide—and whether it actually encourages more small businesses to purchase new coverage or maintain current plans—has not yet been determined. Critics claim the credit is far too limited in scope, and that it does nothing to address the overwhelming burden of rising health-care costs.

Complexity is an issue as well, Williamson said.

“It takes a number of painstaking steps to determine what your credit might be,” he explained. “Most small employers, and particularly start-ups, need to devote all their time to keeping their businesses afloat. I’m concerned many won’t take advantage of the credit because of the time and effort needed simply to compute it.”

But if eligible small-business owners can overcome this complexity, Williamson said, “it’s at least a good start to providing very small businesses with some needed tax relief.”

Changes Ahead

The structure and amount of the credit will remain the same through 2013, but other provisions included in the Affordable Care Act are slated to bring significant changes beginning in 2014.

Health Insurance Exchanges: By 2014, states are required to create health insurance exchanges, new competitive marketplaces designed to provide individuals and families with access to quality coverage options at affordable prices. States must also create Small Business Health Options Program (SHOP) exchanges. These entities are designed to streamline plan choices and increase competitive pressure on insurers to bring prices down.

Small businesses with fewer than 100 employees will be able to purchase health insurance through SHOP exchanges beginning in 2014. For those that do, the amount of the Small Business Health Care Tax Credit will go up to 50 percent of the employer’s contribution to health-care premiums, and up to 35 percent for small tax-exempt organizations.

Beginning in 2017, states may begin to allow larger employers with more than 100 employees to purchase insurance through SHOP exchanges. The CBO projects that by 2019 approximately 5 million workers will gain insurance through an exchange.

Shared Responsibility Payments: Also taking effect in 2014 is a provision to impose shared responsibility payments on employers who fail to offer sufficient health coverage to their employees.

Under current law, in 2014 employers with 50 or more employees who do not provide coverage—or whose employees must use public subsidies in order to afford the coverage offered—will face a penalty of $2,000 per full-time employee (although the penalty does not apply to the first 30 workers in the firm).

Small employers with fewer than 50 employees—which represent nearly 96 percent of all US firms—are not subject to these penalties. “Very small businesses are exempt from these payments,” said Kautter. “But we’ll need to carefully examine their effect on mid-size businesses. Many of those businesses still struggle to cover the costs of health insurance, and these penalties could restrict their growth and success.”

He explained that more changes to the current health reform law could be on the horizon. “As we all witnessed, the debate on health-care reform became an extremely partisan battle. Opponents of the Affordable Care Act are pursuing significant changes—some are even challenging the constitutionality of certain provisions and demanding repeal.”

“When it comes to health-care reform, I don’t think anyone can predict what the future holds,” Kautter continued. “But we’re glad that the needs of small employers are receiving some concentrated focus. Small businesses have a tremendous stake in how our health-care system is restructured.”

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