The Affordable Care Act and Small Business

The Patient Protection and Affordable Care Act was passed by Congress and signed into law by President Obama on March 23, 2010. Together, the Health Care and Education Reconciliation Act of 2010 and the Affordable Care Act (ACA) transformed the existing healthcare system in the United States by instituting changes that affected “insurance coverage, affordability and accessibility of insurance, the financing on medical care, and the operation of the Medicare program.” [1]

Which Small Businesses Are Affected by the ACA?

Whether a “small business” will be directly penalized by ACA mandates depends strictly on its size. While the Small Business Administration's (SBA) Office of Advocacy defines a small business as any independent business that employs fewer than 500 employees (for a more detailed description of SBA’s small business classifications by industry and sector see SBA guidelines), the ACA mandates that businesses with greater than 50 full-time employees to provide health insurance. Small firms employing fewer than 50 full-time employees constitute an overwhelming majority of small businesses and are exempt from the employer mandate (also known as the Employer Shared Responsibility Payment or "Play or Pay" penalty). [2]

Under the ACA’s employer shared responsibility provisions, these Applicably Large Employers (ALE) employing 50 or more full-time equivalent (FTE) employees are required to offer “affordable” minimum essential coverage that provides “minimum value” to their employees and their dependents. If an ALE fails to provide health insurance to 95 percent of its full-time employees and their dependents, the business must make an employer shared responsibility payment, of $2,000 (indexed for future years) for each full-time employee beyond the first 30 employees, to the IRS.[3]

Employer Shared Responsibility provisions apply to employers that employed 50 or more full-time equivalent employees during the previous calendar year. HHS Full-time employees are considered those who work on average 30 hours or more a week for more than 120 days in a year, while part-time employees are those who work on average less than 30 hours per week, but more than 120 days per year. To find the total number of full-time equivalent employees, the aggregate number of hours worked by part-time employees should be divided by 30 and added the the number of full-time employees. [4]

It is important to note that many small businesses are not subject to ACA requirements. Deutsche Bank Global Markets Research Census data from 2010 and 2012 reveals that an overwhelming majority of U.S. firms employ fewer than 20 employees, as firm size in the U.S. (number of workers employed by American businesses) follows a fat-tailed distribution. Therefore, most small businesses are not subject to the ACA’s employer-sponsored insurance mandate. Firms with over 500 employees, however, employ the greatest share of the workforce and contribute the most toward total employment in our economy. [5]

The Trend of Rising Premiums

The biggest complaint about the ACA concerns the trend of rising premiums. The Congressional Budget Office (CBO) has found that while “premiums for private insurance have grown relatively slowly in recent years, they have usually grown faster than” average income and the economy as a whole. From 2005 to 2014, premiums for employment-based insurance increased by 48 percent for single coverage plans and by 55 percent for family coverage. What’s more, the CBO and Joint Taxation Committee (JCT) forecast premiums to increase at a comparable growth rate for the next ten years, averaging roughly two percentage points faster than per capita GDP annually.

Whether this increase is due primarily to the ACA is another story. The CBO points out while many of the ACA’s regulations increase premiums, the spike has been more apparent in the nongroup market. For example, in selling policies, insurers must now “accept all applicants during specified open-enrollment periods” and limit their reliance on age in determining rates. Additionally, the ACA disallows carriers from evaluating premiums on the basis of health and restricting coverage for preexisting health conditions. Finally, insurers “must cover specified categories of health care services” and pay at least 60 percent of the costs associated with those services. The CBO claims that these aforementioned regulations “increased premiums noticeably in the non-group market,” while other markets experienced more “limited effects.” [6]

How can small businesses alleviate the rising costs of healthcare?

Although small businesses that employ fewer than 50 full-time employees are not required to provide health insurance to their employees under the ACA, many do. These firms will find themselves paying higher premiums as the cost of health insurance continues to rise. If small employers are unable or unwilling to pay the health premiums, they may be forced to discontinue their employer-sponsored healthcare coverage, and consequently, some workers might seek other employment to gain access to health coverage.

Small businesses that employ greater than 50 employees can avoid paying the increased costs of insurance coverage. Alternatives include increasing employees’ deductibles, negotiating private insurance plan prices or switching from a group plan to individual employer-sponsored options, such as Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA), or direct primary care. [7]

The SHOP (Small Business Health Options Program) Exchange, created by the ACA, provides another option for small businesses with fewer than 50 FTE employees to purchase more affordable insurance. SHOP utilizes group plans and tax credits to offer lower healthcare costs and increased employer choice functions, by enabling employers to choose from a larger pool of available coverage options. [8] The exchange grants small businesses with increased buying power in the group-plan market - an advantage usually enjoyed by larger firms - and provides a simple mechanism for small businesses to compare the price, coverage, and quality of plans.[9] Small businesses that purchase insurance through the SHOP exchange and employ fewer than 25 FTE employees may also be eligible for the Small Business Healthcare Tax Credit.

The requirements for a small business to qualify for the small business tax credit can be found here. The tax credit can be worth up to 50 percent of a business’s contribution toward its employees' premium costs (up to 35 percent for tax-exempt employers), depending on the firm’s number of employees and wages. The tax credit is the highest for small businesses that employ fewer than 10 employees, with average annual salaries of $25,000 or less. “The smaller the business, the bigger the credit.” [10]

How has the ACA affected small business hiring practices?

The visible effects of the ACA on small businesses, if any yet, are mostly being felt by employees, as some businesses are slowing or halting their hiring practices and cutting employees’ hours. In 2012, two years after the introduction of the ACA, Gallup and Wells Fargo conducted a survey of 600 small business owners. The survey revealed that 48 percent of small business owners pointed to "potential healthcare costs" as a reason for not hiring more employees.[11] According to another 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, and one in five small business owners reported that they have cut their number of employees.[12]

For small businesses that are nearing 50th employee mark, the 51st hire presents a large marginal cost to the firm. Firms that employ 50 or employees and refuse to provide qualified health insurance coverage must pay a tax penalty of $2,000 for each uninsured employee beyond the first 30 employees. Furthermore, firms that employ 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 have concerns about expanding their businesses. However, regulators delayed penalties against firms who employ between 50 and 99 employees until 2016 as a transitional relief to small businesses from the employer mandate.

Link to Google Doc

https://docs.google.com/document/d/1ixVOtmSLhj_1J76ngWSoRIphzx1GCxvZX9ttfvEeK_o/edit