The Affordable Care Act and Small Business

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Blog Post
Title The Affordable Care Act and Small Business
Author Meghana Gaur
Content status Tabled
Publication date
Notes Tabled pending further information about possible ACA replacement.
©, 2016

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 reforms to increase the quality, affordability, and accessibility of insurance coverage and expand Medicaid. [1]

Which Small Businesses Are Affected by the ACA?

Whether a small business will be affected by ACA mandates depends 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 affects only small businesses with more than 50 full-time employees.

Under the ACA’s employer shared responsibility provisions, 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 a firm 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. Furthermore, firms that employ more than 50 workers must contribute, at a minimum, 60 percent of the cost for employees' coverage. [2]

Employer Shared Responsibility provisions apply to employers that employed 50 or more FTE employees during the previous calendar year. [3] FTE employees are those who work on average 30 hours or more a week for more than 120 days in a year. Part-time employees are considered those who work on average less than 30 hours per week, but more than 120 days per year. The number of FTE employees can be found by totaling the aggregated number of hours worked by part-time employees divided by 30 with the aggregated number of hours worked by full-time employees. [4]

Most small businesses are not subject to ACA requirements. Deutsche Bank Global Markets Research Census data from 2010 and 2012 shows 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 skewed distribution. A majority of businesses actually employ fewer employees than the average firm size. Firms with over 500 employees, however, employ the greatest share of the workforce and contribute the most jobs in our economy. [5]

The Trend of Rising Premiums

The Congressional Budget Office (CBO) has found that premiums for private insurance have 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 (JTC) 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. [6]

Whether the ACA is to blame for premium hikes is another story. The CBO points out that while many of the ACA’s regulations increase costs, the spike has been more apparent in the non-group 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.The CBO’s report claims that these regulations increased premiums in the non-group market, but effects on other markets were more limited. [7]

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 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 alternative employment to gain access to health coverage.

Small businesses that employ greater than 50 employees can mitigate increased costs by 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. [8]

The SHOP (Small Business Health Options Program) Exchange, created by the ACA, provides another option for small businesses with fewer than 50 FTE employees. 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. [9]

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. 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. [10]

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 highest for small businesses that employ fewer than 10 employees, with average annual salaries of $25,000 or less; as states, the “smaller the business, the bigger the credit.” [11]

How has the ACA affected small business hiring practices?

The more readily available effects of the ACA on small businesses are on employees. Some small businesses report 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.[12]

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. One in five small business owners reported that they have cut their number of employees.[13]

For small businesses that are nearing the 50th FTE mark, the 51st hire evidently presents a large marginal cost to the firm. Specifically, firms that employ 50 or more FTEs 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. This increased marginal cost serves as a reason for why many critics believe that the ACA is “killing jobs.” However, the government delayed penalties for small businesses that employed between 50 and 99 employees until 2016, as a transitional relief from the employer mandate. In 2016, these small businesses will be for the first time subjected to the burden of the ACA’s employer mandates.

Going forward, these small business owners may be forced to purchase insurance coverage for their employees from a market that continues to hike up premium rates. While the long-term effects of the Affordable Care Act on small businesses remain largely unknown, policymakers should adopt prudent and necessary measures in order to mitigate increased healthcare costs for small businesses.

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