Obamacare and the Small-Business Owner

Suppose you’re a small-business owner, and you’re unsure how to deal with the choices you face under the new healthcare reform law. Unless you employ mainly high-income people, your best option is probably to avoid providing health insurance altogether. The reason: your employees will be able to obtain insurance that is cheaper (for them) in a new health insurance exchange than you can purchase as an employer. This conclusion is probably valid even if you have to pay a fine for not insuring your employees and even if you forgo the new health insurance tax credit the government will be offering you.

Mandated Health Insurance

If your company employs fewer than fifty-one fulltime workers, you will be exempt from penalties for failing to offer health coverage. The fifty-first worker, however, could be a very expensive hire. If you employ fifty-one or more workers, failure to provide insurance will subject you to a tax penalty of $2,000 for each uninsured employee beyond the first thirty employees. So growing from fifty to fifty-one uninsured workers would subject you to a fine of $42,000 [(51−30) × $2,000] for adding the last worker. This fine, however, will be much smaller than the cost of providing fifty-one employees with the insurance mandated under the Affordable Care Act. Moreover, the fine is much smaller if a firm hires a significant number of part-time workers (those working less than 30 hours per week). In the example above, if twenty of the firm’s fifty-one workers were replaced by part-time workers, the firm’s penalty would fall from $42,000 to only $2,000.[1] One implication: Many workers who want full-time work may only find part-time work.

A Catch-22

If you are an employer who already provides insurance, you may be able to retain your current health plan by claiming grandfather status. This would make you immune from cost-increasing regulatory burdens, since the mandated benefit package is likely to be more generous and more costly than what you have now.

Any substantial change in your health plan, however, such as switching to a new insurance carrier, will cause you to lose your grandfather status—even though changing insurers is the main way small firms keep premiums down. As a result, you can accept double-digit premium increases for your existing insurance or you can shop around for new coverage, in which case you will lose your grandfather status and have to comply with dozens of costly new mandates.

Under a mid-range estimate, two-thirds of small-business employees will lose their grandfather status by the end of 2013 and will no longer be able to keep the plan they now have. Under the worst-case scenario, as many as 80 percent will lose their grandfather status.[2] By contrast, a self-insured, large company plan or union plan is free to change its third-party administrator as often as it likes and still keep its grandfather status.[3]

Employer Access to an Exchange

If you have fewer than 100 employees, you will be able to purchase coverage in a health insurance exchange rather than buy insurance in the small-group market. However, your employees will not be able to obtain the subsidies that individuals will receive if they are buying their own insurance. Also, just as insurers selling in the exchange will not be allowed to charge premiums based on health status, that same requirement will also govern the small-group market outside the exchange. So at this point, it is unclear whether there will be any financial advantage to using the exchange, if you are paying the premiums.

Uninsured Employees’ Access to an Exchange

We do not know at this point what health insurance in a health insurance exchange is going to look like. However, the CBO estimates the average cost of a health plan will be about $5,800 (individual) or $15,200 (family) in 2016.[4] This suggests that the insurance will look a lot like a standard BlueCross plan paying BlueCross fees to providers. Moreover, most people earning less than $70,000 or $80,000 per year will be able to get a subsidy in the exchange that is much more generous than the tax subsidy available for employer-provided coverage.

Take a 40-year-old employee with a family who is earning, say, $30,000. If you provide the government-mandated insurance at work, you will have to spend an amount equal to about half the employee’s salary. The only subsidy is the ability to pay premiums with dollars that are not included in the taxable income of the employee. Since this employee makes too little to pay income taxes, you will only be avoiding a 15.3 percent (FICA) payroll tax, and that is worth about $2,800.

If this same employee enters a health insurance exchange, however, he will be charged a premium of only $1,000. The government will pay the remaining premium and reimburse the family for most of its out-of-pocket costs—bringing the total expected annual subsidy to about $11,200.[5]

So, combining your financial interest with your employee’s, there is a potential gain of $6,400 if the employee gets health insurance in the exchange rather than at your place of work. That is money that could be used to pay higher wages, provide other benefits, or add to company profits. Note also that the financial gain from sending the employee to the exchange in this case far exceeds a potential $2,000 fine. It also exceeds the value of any small-business health insurance tax credit.

Potential Benefit: A New Small Business Subsidy

The new law includes a health insurance tax credit that may help you purchase health insurance for your employees. However, the credit is available for only six years and only for firms that have twenty-five or fewer employees and pay wages that average less than $50,000. Moreover, most businesses will not meet the strict (and complex) criteria for claiming the credit. In fact, fewer than one-third of small businesses will qualify according to the National Federation of Independent Business, the trade association that represents small business.[6] Also, the credit is not available to sole proprietorships and their families.

Even so, the big surprise is that so few businesses are claiming the credit. The IRS estimates that 4.4 million firms are eligible, and the CBO expected $2 billion in subsidies would be paid out in 2010 alone.[7] Yet at a hearing of the House Ways and Means Committee, the Treasury Department’s Inspector General J. Russell George reported that as of mid-October, 2011, only 309,000 businesses had claimed the credit, for a total payout of $416 million.[8]

Why so few? Patricia Thompson of the American Institute of Certified Public Accountants explained that the tax credit violates all of the organization’s principles for sound tax policy. Among other flaws, the small-business tax credit is astoundingly complicated and opaque. Ms. Thompson testified:

In order for an incentive to be effective, taxpayers must know of its existence, know whether it applies to them and how it applies to them. Since most small employers did not know until the end of the year (or after the year ended when their income tax returns were prepared) whether or not they qualified for the credit, there was no incentive for them to provide health insurance coverage.[9]

Limits on Employee Premiums

If you do decide to provide the mandated health insurance benefit to your employees, you may be required to limit the amount of premiums some employees pay to a percentage of their income. For example, health plans are considered unaffordable if workers earning less than 400 percent of the federal poverty level (about $88,200 for a family of four) are required to pay a premium that is more than 9.5 percent of the worker’s wage. The premium for an employee earning $30,000, for example, would be deemed unaffordable if it were higher than $2,850. For firms with more than fifty workers, employing a worker whose premium is unaffordable may result in a $3,000 fine.

For more on how the Affordable Care Act may affect you, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.

Notes:

1. “Employer Mandate Penalties: Calculations,” National Federation of Independent Business, undated, http://www.nfib.com/LinkClick.aspx?fileticket=8lmj3UFCpy0%3D&tabid=1083.

2. “Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan under the Patient Protection and Affordable Care Act,” Federal ­Register, June 17, 2010, http://www.ncpa.org/pdfs/employees-not-grandfathered-in.pdf#page=54.

3. Chris Jacobs, “Did Unions Just Obtain Another Backroom Healthcare Deal?” Republican Policy Committee, June 14, 2010.

4. Many individuals may choose health plans that are less comprehensive than the average plans sold in the exchange. The CBO estimated the minimum (bronze) plan sold in the exchange will cost individuals between $4,500 and $5,000 (families $12,000–$12,500). See Douglas W. Elmendorf, “Letter to Honorable Olympia Snowe,” Congressional Budget Office, January 11, 2010, http://www.cbo.gov/ftpdocs/108xx/doc10884/01-11-Premiums_for_Bronze_Plan.pdf.

5. The Henry Kaiser Family Foundation, “Health Reform Subsidy Calculator,” June 22, 2010, http://healthreform.kff.org/SubsidyCalculator.aspx.

6. Dan Danner, “ACA vs. Small Business,” Wall­ Street­ Journal, May 27, 2010.

7. Douglas W. Elmendorf, “Letter to the Honorable Harry Reid,” Congressional Budget Office, December 19, 2009, http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf; Greg Scandlen, “Whatever Happened to the Small Business Tax Credit?” John ­Goodman’s ­Health ­Policy ­Blog, December 28, 2011, http://healthblog.ncpa.org/whatever-happened-to-the-small-business-tax-credit/.

8. The Honorable J. Russell George, “Implementation and Effectiveness of the Small Business Healthcare Tax Credit,” (Hearing Before the Committee on Ways and Means Subcommittee on Oversight, US House of Representatives, November 15, 2011), http://waysandmeans.house.gov/UploadedFiles/GeorgeTestimonyOS911.pdf.

9. Patricia Thompson, American Institute of Certified Public Accountants (Testimony Before the Committee on Ways and Means Subcommittee on Oversight, US House of Representatives, November 15, 2011), http://waysandmeans.house.gov/calendar/eventsingle.aspx?EventID=268046.

[Cross-posted at Psychology Today]