Affordable Care Act

The Patient Protection and Affordable Care Act was passed by Congress and signed into law by President Obama on March 23, 2010. Together with the Health Care and Education Reconciliation Act of 2010, the law completely replaced the existing health care system in the United States, by expanding Medicaid and Medicare, and mandating all individuals to sign up for health insurance coverage through a Qualified Health Plan (QHP's must be offer affordable and comprehensive coverage - either privately or publicly funded). Here is a link to the complete text of the PPACA and the Health Care and Education Reconciliation Act.

One concern with the Patient Protection and Affordable Care Act is that “Obamacare” will kill Small Business [1]. Obamacare's effect on small businesses is not necessarily seen in the abandonment of plans to grow businesses or death of businesses themselves, but rather, in a slowing or halting in hiring, as well as a cut in employees hours. According to a Gallup and Wells Fargo survey of 600 small business owners conducted in 2012, 48% of small business owners point toward "potential healthcare costs" as a reason for not hiring more employees [2].

Still, while the ACA may have caused a slowing or ceasing in small business hiring practices, the exact harm of Obamacare regulations and mandates to small businesses depends heavily on small business size because the effects vary so greatly between firms of different compositions and sizes in their workforces (i.e. number of full time employees, average wages, state of operation).

The SBA has established a summary of size guidelines for small businesses to qualify "as a small business concern for SBA and most other federal programs" [3] (500 employees for mining and manufacturing businesses or an annual receipt of $7.5 million in average annual receipts for non-manufacturing firms), but these small business standards vary between industries. The United States has almost 6 million small businesses that fall under small business size classifications; however, 90% of small businesses employ fewer than 20 people [4]. More precisely, 61% of firms have between 3 and 9 employees, while 98% of firms employ between 3 and 199 employees. [5]

According to the ACA, small businesses with fewer than fifty full-time equivalent employees are exempt from the employer mandate. At the time of the ACA'S enactment in 2012, only 200,000 small businesses would have been affected by the employer mandate, as 96% of the small businesses employed fewer than 50 employees [6].

Furthermore, while the cost of insurance premiums and plans have assuredly risen post-ACA, health insurance premiums have been increasing due to rising health care costs for many years (prior to the act's enactment) [7] [8].

The ACA and Small Business

The Affordable Care Act uses the terminology “full-time equivalent” (abbreviated FTE) when calculating the number of full-time employees.

Calculation for finding the number of full-time equivalent employees: # of FTE's = Total Number of Full-time Employees + [Combined Number of Part-time Employees Hours )/ 30]

A full-time employee is any employee who worked on average more than 30 hours a week for 120 days or more in a year [9].

Another criterion for determining mandate-exemption or tax-credit status is the average annual wage of employees: Average Annual Wage = Total Wages Paid by an Employer / Number of FTEs, rounding down to the nearest $1,000 [10].

The employer mandate of the ACA applies to relatively larger small businesses - firms with greater than 50 FTE employees - but many of these larger businesses offer health insurance coverage for their employees already.

Small Businesses with Fewer than 50 FTE

Despite all of the backlash the Patient Protection and Affordable Care Act, or Obamacare, has received for its perceived potential destruction of small businesses, for the most part, small businesses with under 50 full time equivalent employees are not unavoidably burdened by the ACA. In fact, companies with fewer than 50 FTE, which make up a large portion of small businesses, are not penalized at all for choosing not to provide employer-sponsored health care.

If employers with fewer than 50 FTE find themselves unable or unwilling to accommodate the rising costs of health care, they can simply opt out of providing employer-sponsored health insurance. Those who do decide to provide employer-sponsored health insurance will face the rising premiums and increased regulation, as a result of the ACA's minimum standards for Qualified Health Plans (increased comprehensiveness and affordability).

Regulations on Health Care Coverage

Although small businesses with fewer than 50 employees are not mandated by the ACA for to provide health care insurance to its employees, there are additional regulations and provisions associated with the ACA that increase the cost of providing health insurance for the firms that do choose to do so. The ACA:

• requires employers to provide their employees with a Summary of Benefits and Coverage Disclosure Rules (SBC’s), a standard form that explains to employees what their plan entails (noncompliance may result in a further penalty).
• caps the maximum contribution an employee can make toward a flexible spending arrangement at $2500
• increases Medicare withholdings on employees with wages over $200,000 and $250,000 for married joint filers
• assesses net investment income for Medicare (taxable capital gains, dividends, rents, royalties, and interests) for single filers with a Modified Adjusted Gross Income of $200,000 for a single filer (and $250,000 for married joint filers)
• institutes a 90-day maximum waiting period for employees to provide health care coverage employees who are eligible, as well as penalties for exceeding the 90-day period.
• incentivizes employers, using inducements, such as as subsidies on health insurance plans, to offer Workplace Wellness Programs that satisfy the federally accepted requirements.
• for employers that sponsor self-insured plans, requires another information reporting that is separate from the information reporting required for employers with more than 50 FTE [11].

Options for Small Businesses

Health care is not a mandatory service for small businesses with fewer than 50 FTE, but many small businesses still provide health insurance to their employees. These companies, along with large companies, are seeing steeper premium prices on their insurance due to the ACA stipulation that health care companies cannot deny or charge coverage based on an individual's health or risk factors, pre-existing conditions, or sex. However, options to compensate with the increased cost of providing health care, the most obvious of which are opting out and increasing employees' contribution (if possible), include:

• participating in the SHOP Exchange
• negotiating on private insurance plan prices
• converting their employee group plans into individual employer-sponsored plans, such as Health Savings Accounts or Health Reimbursement Accounts (HSA’s and HRA’s)
• switching to direct primary care
• using Workplace Wellness Programs

While some of these options may be accompanied by risks, they can serve as cheaper employer coverage alternatives. [12].

Increased Marginal Cost for 50th Employee

Small businesses with fewer than 50 FTE are exempt from the penalties of ACA; however, as soon as a company reaches the 50th employee mark, the hire becomes much more expensive, potentially dis-incentivizing small businesses from expanding their labor force.

Firms that employ 50 or more workers and do not provide qualified health insurance coverage must pay a tax penalty of $2,000 for each uninsured employee beyond the first 30 employees. Furthermore, firms with more than 50 workers must contribute, at a minimum, 60 percent of the cost for employees' coverage. [13]. This increased marginal cost for the 50th employee serves as a reason why many critics of the ACA believe that the ACA is killing jobs and also why many small business owners may have concerns about expanding their businesses.

According to a survey conducted by the Society for Human Resource Management of more than 600 small business owners:

• More than four out of ten small business owners have delayed hiring due to uncertainty about the effects of the ACA [14].
• One in five small business owners reported that they have cut their number of employees [15]

The Society for Human Resource Management's study also found that about one in five small businesses are reducing workers' hours to part time because they are not required to offer coverage for employees who work less than 30 hours per week. These part-time employees are eligible for subsidized coverage in the new health insurance exchanges offered through the ACA [16].

Companies with 50 to 100 FTE employees are required to provide health insurance coverage to their employees, but the penalties imposed for not complying with the ACA requirements for these companies were delayed until 2016. Companies with up to 100 FTE employees can purchase insurance through the employer-only insurance exchanges, were are run by the states; these exchanges could possibly result in lower health care costs for small businesses by pooling customers [17].

The employer mandate penalty for companies with more than 99 employees was delayed until 2015. With all of the delays in penalties, it is difficult to fully understand and analyze the exact effects of the ACA on small businesses (especially those that are required by the law to provide health insurance to its employees).

SHOP Exchange

The SHOP Marketplace or Exchange (Small Business Health Options Program, is a provision of the ACA designed to get small businesses lower health insurance rates using group plans and tax credits for providing employee-sponsored health coverage.

The SHOP exchange did not open up to employers with fewer than 50 FTE until 2015 and only just opened up in 2016 to businesses with 100 FTE or less. SHOP allows for increased employer choice functions, enabling employers to choose from a larger pool of available coverage options for employees [18] The financial advantage of purchasing insurance trough the SHOP exchanges is uncertain, as insurers in the marketplace cannot charge premiums based on health status, and workers using the SHOP exchanges, will become ineligible for subsidies when they buy their own insurance [19]. What SHOP does offer small businesses is increased buying power in the group-plan market (an advantage only larger firms used to possess) and a simpler way to compare prices, coverage, and quality of plans [20].

Small Employer Health Insurance Tax Credit

There is also a temporary health insurance tax credit available to firms with 25 or fewer employees and making less than $50,000 in annual wages. However, many firms do not meet the strict requirements necessary for obtaining the tax credit that would cover up to 50% of employer contributions to employees' health insurance premiums (up to 35% for tax-exempt employers):

• 1) Firms must employ fewer than 25 full-time equivalent (FTE) employees
• 2) Have an average employee salary of less than $50,000 per year (adjusted for 2014 inflation rates)
• 3) Employer must pay for at least 50% of all FTE employees' premium costs
• 4) Employee Coverage must be through Qualified Health Plans, purchased through the SHOP Marketplace
• 5) Only employers with 10 or fewer FTE with annual wages of less than $10,000 can qualify for the full tax credit ( "the smaller the business, the bigger the credit" [21])
• 6) Employers cannot claim the tax credit for more than two consecutive and taxable years (starting in the first taxable year after 2014)

The health insurance tax credit became available to firms in 2014 [22]. After 2014, the maximum credit amount increases from 35% to 50% of employers' share of premiums. The tax credit is quite under-inclusive, though, and according to the National Federation of Independent Businesses, only one in three small businesses qualify [23]. Of the estimated 1.4 to 4 million small businesses that were eligible for the wide range of tax credits, only 181,000 actually claimed the Small Employer Health Insurance Tax Credit in 2014.

According to Holly Wade, the director of research and policy analysis for the NFIB Research foundation, "the small business tax credit is a better talking point than it is a financial incentive for small businesses" [24].

Conclusion

Uncertainty surrounds the effect of the ACA on small businesses because of the many delays and exemptions in the rollout process and implantation of the ACA’s mandates and provisions. Considering the status quo and general trends of the health insurance market, the ACA seems it will likely turn out not to be the “job-killer” or “enemy of small business” it was predicted to be. And largely, while insurance premiums will continue to rise for the firms, which have to provide employer-sponsored health insurance to its employees, the bill should not seriously harm small businesses and startups with fewer than 50 full time equivalent employees.

In fact, the head of the CBO Douglas Elmendorf said, “We don’t think that the healthcare law is having a significant impact on the economy today… It would reduce the amount of labor used in the economy by about a half a percent at the end of the decade… but, most of that is people choosing not to work because they can obtain health insurance at an affordable price outside of the workforce” [25]. John Arensmeyer, founder and CEO of the Small Business Majority, in a statement reported by Fox News, said that “The Affordable Care Act tackles small business owners’ top priorities when it comes to health-care reform: cost and accessibility. The law will significantly rein in costs while providing more health coverage options for entrepreneurs.” [26].

References

1. Gallup

2. Obamacarefacts

3. Obamacarefacts

4. Obamacarefacts

5. SBA

6. CNBC

7. NCPA

8. NCPA

8. Congressional Research Service

10. NCPA

11. Obamacarefacts

12. Obamacarefacts

13. NCPA

14. Ballotpedia

15. Ballotpedia