This month the Supreme Court handed down its much-awaited decision on President Obama’s health-care policy, and largely upheld the controversial bill. Detractors argue the ruling adds yet another layer of uncertainty to an already-struggling small business community; meanwhile many business owners say they are still not clear on how the law will impact them.
From potential penalties to taxes, here is a case-by-case breakdown of some of the impacts the law will have on small businesses.
If you are a sole proprietor:
Anyone who is self-employed will be viewed by the government as an individual in the health-insurance marketplace, and will be liable to either purchase health insurance through a state-sponsored mandate, or pay a $95 fee annually beginning in 2014 for not complying with the Affordable Care Act, according to Bob Litan, VP of research and policy at the Kauffman Foundation. Twenty-one million U.S. businesses are owned by these “solopreneurs,” according to census data.
“You will have to file that fee as a part of your income tax return,” Litan said.
While some argue it is unfair to force individuals to get health insurance or pay a penalty, Steven Aldrich, CEO of Outright.com, a small business financial service software company, said those in this group who may have been denied coverage in the past due to pre-existing conditions could benefit from the chance to shop in state-sponsored health-insurance exchanges.
These exchanges will have to be up and running by January 2014, according to Litan. Each state will have its own exchange website, and plans for individuals can be selected similarly to how those 65 and up can currently purchase supplemental insurance online.
Ray Keating, chief economist for the Small Business & Entrepreneurship Council, argues that pushing these sole proprietors to purchase insurance takes money that they could be investing in growth away from them.
"The individual mandate, buying insurance or paying the penalty, means resources being drained away from the sole proprietor trying to start up, build or sustain a business. At the same time, the notion that this will somehow help to reduce health insurance costs will prove a grave failure, setting up a grim scenario for small businesses of rising taxes, increased regulation and escalating insurance costs,” Keating said.
But Aldrich said, with more individuals purchasing health insurance, premiums should go down.
“I have heard people say they can’t leave employers, because they can’t afford insurance,” he said. “So for solopreneurs, who see health care as a barrier to entrepreneurship, it’s a big win.”
Litan echoed this notion, calling the decision a “win” for would-be entrepreneurs stuck in corporate America only because of the insurance coverage it affords them or their families.
“This removes a disincentive to become an entrepreneur,” he said. “Especially for those with pre-existing conditions, this [decision] is pro-entrepreneurship.”
If you are a small business with less than 50 employees, not offering health insurance:
Business owners with between 30 and 50 workers will be subject to fees of $2,000 per worker, per-year, for failing to offer employees health insurance, Keating said.
There is much emphasis on businesses with fewer than 50 workers, however, those businesses with 29 workers and less will be the only truly “exempt” group when it comes to fees, Keating said. The impact of this law may discourage companies from adding additional workers and reaching that 30-employee level, where fees kick in, he said.
“Firms will make growth decisions based on how many employees they have, not surprisingly. That is an impediment to expansion and growth,” Keating said.
Insurance can typically cost up to $4,000 per-worker, per-year for a small company, Litan said, so many small businesses in this group may opt to pay the $2,000 penalty per-worker annually rather than offer coverage.
“Presumably there will be a big chunk of employers that won’t buy [coverage] for workers,” he said.
Aldrich said this group of companies with less than 50 workers is among the largest segment of non-insured businesses, with only less than half of small businesses in this range offering insurance to workers, according to the Kaiser Family Foundation’s 2011 survey data.
While some lament over losing the right to choose whether or not to offer health care coverage, Aldrich counters that the tax credit these businesses receive for doing so can help offset the cost.
“Those who don’t offer coverage will have the opportunity to use an exchange, and will see their small business tax credit increase as much as 50% of that premium payment,” he said.
If you are a small business owner with 50 or more employees, not offering health insurance:
Small businesses with at least 50 employees will be subject to that $2,000 penalty per- employee annually for failing to offer coverage, Litan said. However, he argues businesses in this category will likely opt to offer coverage for workers, because failing to do so will hurt them competitively.
“Market pressure will force you to buy insurance once you hit around 100 or more employees,” he said. “It’s a competitive tool, and you don’t want to lose your workers.”
Keating said business owners in this category, with between 50 and 100 workers, get a bad rap for not providing insurance, when many want to but simply can’t afford it.
“Overwhelmingly, businesses want to offer the best benefits package they can, it’s not a case of them being bad or evil,” he said. “You will have companies functioning on tight margins, having a tough time staying afloat, and then having to pay a per-employee, per-month penalty for the government.”
He argues these are resources that could be invested in growth rather than paying penalties, and that this group will be hit most immediately and the hardest.
Businesses currently offering health care to workers:
Litan said the implications for this group are pure speculation at this point, as health-insurance exchanges have yet to be set up, and that for the most part, companies currently offering coverage will be unaffected.
Keating dissented, and said the marketplace will be vastly different with new exchanges in place.
“Even if you think you are fine right now, the insurance market will change,” Keating said.
Aldrich added that the higher the number of employees you have using your insurance plan means a higher tax credit for you that year.
Tax policy for all small businesses:
Aldrich said taxes, in general, should eventually fall once the Affordable Care Act is implemented. The reform in itself shouldn’t have an outright impact on the small business tax environment.
“What will happen, over time, is that we will get control over health-care costs, and the impact on all of us—small businesses and individuals—is that we may see a lower tax burden, because of lower health-care costs,” he said.“This is a really good first step, to have everyone on the same boat. There will be a stronger incentive for the health-care community to bring costs down, and there will be more transparency with insurance exchanges.”
Keating disagrees, saying that with government footing more of the bill for health-care costs, taxes are bound to increase across the board. “Costs will be higher as government picks up more of the tab,” he said. “And costs are always multiple times higher than originally projected.”