While much of the law doesn’t go into effect until 2014, there are some immediate ramifications.
By Carol Brzozowski
It’s said that small businesses—defined as companies with no more than 100 employees—are the backbone of the United States economy. Production of specialty fabrics products, often requiring very specialized or custom work, certainly exemplifies that statement.
The new health care reform law contains many provisions pertaining to small businesses, not always easy to understand. Experts advise that business owners should start having discussions right now with employees, tax advisers and other key people, before the new laws kick in.
While much of the law doesn’t go into effect until 2014, there are some immediate ramifications: some tax credits, children being able to stay on parents’ policies until age 26, no discrimination against children with pre-existing conditions, a ban on lifetime limits, a ban on cancelling policies already issued and for which premiums are being paid, and accountability for excessive or unjustified rate hikes by insurance companies.
Here’s how the health insurance reform law will affect many small businesses:
- By 2014, states must set up Small Business Health Options Programs, called SHOP Exchanges, giving small businesses a purchasing pool to buy insurance. The Congressional Budget Office (CBO) predicts premiums will decrease by up to four percent through these exchanges.
- States can limit pools to companies with 50 or fewer employees through 2016. Companies with fewer than 50 workers that don’t offer insurance won’t face penalties. Those with more than 50 employees that don’t offer coverage will be assessed $2,000 per full-time worker if any employee relies on government subsidies to buy coverage. The first 30 workers are excluded; two part-time employees will count as one full-time employee for penalty calculations.
- The CBO estimates that tax breaks should lower the cost of insuring employees. Until SHOP Exchanges are set up, businesses with no more than 25 full-time equivalent employees for the taxable year (with annual average wages that do not exceed $50,000) will qualify for a small business tax credit of up to 35 percent of the employer’s contribution to purchase health insurance, increasing to 50 percent when health insurance exchanges are established in 2014. Companies with 10 or fewer full-time equivalent employees (or where average annual wages are less than $25,000) receive full credit.
Sorting out complexities
Employees at the BioPlastics Co. in North Ridgeville, Ohio, a manufacturer of coated webbings, straps and assemblies, have been able to choose from among three medical plans provided by the company, including one traditional plan and two Health Savings Account (HSA) plans.
Currently, BioPlastics participates in a small business co-op in Cleveland called the Council of Small Enterprises. Ethan Boron, president of BioPlastics, says his company is struggling to identify the upside of the new health care law. “We have all enjoyed a good benefits plan here at BioPlastics for the past two decades,” he says. “So far, these changes seem to only be making things more difficult for everyone here.”
For example, company managers are being warned of less coverage at a higher price. “This will make the traditional plan unaffordable and push most of us into even higher deductible HSA plans,” says Boron. Employees will no longer be able to use HSA money for over-the-counter drugs. “Each of us will have to report the cost of our medical plan on our individual W-2s,” says Boron. “Our understanding is that this will not be taxed next year. However,Â it is in good position to be taxed soon, thereby eliminating the HSA tax benefit. This would be a major problem.”
Another challenge for BioPlastics: an increased administrative investment in time and costs to keep up with the new law. “Brokers, accountants, lawyers and plan administrators are all having a tough time understanding and communicating this law,” Boron points out. “The scary part is no one really knows what the impact will be.”
State laws, federal mandates
Cheryl Yennaco runs Atlantic Awning in Melrose, Mass. It’s a small business with 11 employees, so under the new federal standards, she won’t face penalties for not providing health insurance.
But Massachusetts is unique in that the state enacted a health care insurance reform law in 2006, mandating that nearly every resident obtain state government-regulated health care insurance coverage. Those who do not do so are fined tax penalties. Provisions for free health care are made for those earning less than 150 percent of the federal poverty level.
Yennaco says she’d like to offer health insurance to her employees, but to pay 100 percent for their health insurance costs would be a strain on her business. She’s offered them options for which they would pay 50 percent, but they are not willing to do that.
“I have some great employees who I would like to offer health insurance to, and instead right now they’re paying $500 fines every year because they don’t have health insurance,” says Yennaco. “They don’t even necessarily have the $500 to pay it. If I could get them to take that $500 to have a cheaper health plan, I’d probably be able to work something out.”
The principals in Atlantic Awning do have health insurance, and their rates increase 20 to 25 percent each year. “With the economy we’re in right now, I wish that they would just hold the line for a couple of years until things get a little bit better,” says Yennaco.
She adds that her budget cannot accommodate hiring consultants to help her figure out the national health care reform law. “I have to do all of the research myself,” she points out, noting that like so many others, she doesn’t understand all of the law’s nuances.
“I think it’s something that went through too fast and wasn’t planned properly,” Yennaco says. “But I do think things aren’t correct the way it’s going. I’d like the health care that I have, but I don’t like the fact that it’s going up tremendously every year. I do think it’s important that all of my employees should be able to have the ability to have health insurance. I don’t believe at the moment that’s what’s going to end up happening.”
Leveling the playing field
Carl Kleimann, president of the human resources outsourcing firm Odyssey OneSource, Euless, Texas, says there are going to be winners and losers in how the new health care reform law will affect small businesses.
The winners: Small businesses with fewer than 25 employees that are currently providing health insurance to low-wage workers.
The losers: Businesses with more than 50 employees that currently are not providing health insurance to their employees. “These larger firms are going to be forced to spend money—either in the form of insurance premiums or an annual penalty of up to $2,000 per employee for failure to provide coverage,” says Kleimann.
One likely benefit of health care reform is that it should improve access to insurance coverage and should standardize, to some degree, the plans that are available. That could improve a small business’s ability to compete for quality employees that have long been lured by the richer benefit plans offered by larger employers, Kleimann points out. “In today’s knowledge economy, quality employees are more important than ever, and the ability to attract them is often key to success. Even in this era of high unemployment, there is a competitive market for certain skill sets.”
One definite drawback for business will be the administrative work involved in providing health care insurance—“pretty much everyone loses there,” notes Kleimann. “This is going to be extremely onerous, particularly for small businesses that have limited administrative staff.”
For employees, it will mean more choices.
“Today, a company chooses an insurance carrier and a plan design and that’s the only option that is offered,” he says. “Once the insurance exchanges open in 2014, it will become more consumer-oriented. Employees will likely be able to pick from multiple insurance carriers and plan designs. There are many details to be worked out on that between now and 2014.” At that time, individuals will be required to obtain coverage, through their employer or otherwise, Kleimann says.
“Those that fail to do so will be subject to a penalty of as much as 2.5 percent of their household income,” he says. “Insurance carriers are already voicing concern over provisions that limit their ability to manage their underwriting exposure. Prohibiting pre-existing condition limitations and lifetime coverage limits will clearly increase the cost of insurance, but no one is certain how much. The theory is that adding more than 30 million people to the insurance rosters will help offset these additional costs. Only time will tell.”
Now’s the time
What should small business managers do right now? “If you’re not already providing health insurance, start making strategic moves in your business to prepare to do so,“ Kleimann says. “If you choose not to provide health insurance, your employees are going to have to obtain it on their own, or pay a penalty for failure to have coverage. This could put you at a competitive disadvantage with other employers.”
Small business expert and non-bank Small Business Administration (SBA) lender Barry Sloane, CEO of Newtek Business Services, says companies that provide health insurance now should discuss with their insurance provider the law’s impact on coverage.
“That discussion is different if you’re already providing health insurance than it is if you’re not,” says Kleimann. “Those who are not providing insurance should start talking with employees sooner rather than later. Start educating them about the law and what it requires of them. Most employers don’t understand this complex law, so we shouldn’t expect employees to understand it. Would your employees rather have the ability to go to the exchange and get their own insurance, or would they rather have a group plan? Most employees at this point are saying they don’t know enough to answer that question.”
Kleimann believes that some small business owners will decide to pay the penalties and stay out of the health care game, for reasons of cost and the administrative burden. Sloane agrees. “It’s smaller than what it would cost most businesses to insure a family of four,” he says. For sole proprietors and businesses with fewer than 25 full-time employees, the new laws offer a lot of benefits. “But those that have 50 or more full-time employees that don’t provide coverage have until 2014 to decide whether they want to provide coverage or pay the penalty,” says Kleimann.
Small business owners need to start educating themselves in order to make the best decisions for themselves and their employees. “The implications are simply different for a highly compensated work force than for wage earners,” he adds. Newtek’s Sloane believes that the new health care reform law will require small businesses to hire a health care consultant, “just the way small businesses today typically have to hire a tax consultant,” he says. Those tax consultants will also be key players in helping small business owners figure out the tax implications of their decisions, he adds.
Both Kleimann and Sloane state that there are likely to be many changes in the regulations in the coming months and years. That doesn’t mean, however, that you should not start readying your policies and your employees as soon as you can. There’s safety in numbers.