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What The Health Care Decision Means for Your Small Business

The Supreme Court decision Thursday upholds the Affordable Care Act. But as a small-business owner, you may wonder what that means for you.

Most of the law’s key provisions are set to take effect roughly two years from now, on January 1, 2014.

Based on the ruling, all individuals — including small-business owners — must have health insurance starting in 2014, or pay a penalty.

Certainly, the cost of health insurance has become a significant issue for small firms over the past decade.

Overall, about 71% of firms with 10 to 24 employees offered health insurance in 2011, compared with 77% in 2001, according to a 2011 Kaiser Family Foundation survey. Of firms with three to nine workers, just 48% offered insurance in 2011, compared with 58% in 2001.

The high-profile decision is a blow to the National Federation of Independent Business, a Washington, D.C., lobbying group that joined 26 states in fighting the mandate. The NFIB argued that small businesses would suffer if the owners of those entities had to pay for their own health insurance. The NFIB spent more than $1.2 million on the lawsuit in 2010 alone, according to disclosures.

Here’s a look at how you might be affected:


Q. What if I am a one-person business?

A. The impact for sole-proprietors and others with no employees will be much like the impact on individuals.

For people in this group, the crux of the 2014 roll-out is the individual mandate, which requires all U.S. citizens and legal residents to have health coverage or pay a penalty.

You, as a one-person business, would buy insurance through your state’s benefits exchange that will roll out in 2014.

There are some exemptions, however, such as those from certain religious backgrounds and those who are eligible for the so-called “hardship exemption” if the cost of the annual premium exceeds 8% of household income.

There are penalties intended to ensure compliance. The top penalty for individuals, once fully phased in, for not having insurance is $695 or 2.5% of income — whichever is greater.

Q. I have employees or may be hiring. What provisions impact me?

A. If you have employees, the health-care provisions are a bit more complicated.

Since 2010, firms with fewer than 25 full-time equivalent employees have been eligible for a tax break if you cover at least half the cost of health insurance. (Full-time equivalent is the number of employees on full-time schedules plus the number of employees on part-time schedules, converted to a full-time basis.)

But only if you have fewer than 10 full-time equivalent employees and average salaries of $25,000 or less is your firm eligible for the full credit. Today, that full credit is 35% of your contribution toward an employee’s insurance premium. As your firm size and average wage amount goes up, the tax credit goes down. And once your business hits 25 full-time equivalent employees or $50,000 in average salaries, the credit is completely phased out.

Q. What happens to the tax credits going forward?

A. In 2014, the state-based Small Business Health Options Program Exchanges will be open to small firms. And getting insurance through those exchanges could bump the maximum tax credit to 50% of your contribution, up from the current 35%.

But the tax credits won’t last. The credit is only available for a maximum of five years and only two years once the exchanges are up and running.

Q. Will I have to provide health insurance to my employees in 2014?

A. No firm is mandated to provide insurance, but in 2014, only the smallest businesses will be exempt from penalties if they don’t.

Q. What are the penalties and under what circumstances would I be exempt?

A. Once your firm reaches 50 full-time equivalent employees, a penalty will kick in if you fail to provide coverage for employees who average 30 or more hours a week in a given month. The penalty is $2,000 for each full-time employee in excess of 30 full-time employees. There are no penalties if part-time employees are not offered coverage.

A key factor in calculating the penalty is that the equation isn’t based on full-time equivalents, but rather on actual full-time employees. That means some businesses that are subject to the penalty may end up owing nothing.

Here’s a basic example: Say your firm has 25 full-time employees and 50 half-time employees that, combined, equal 25 full-time equivalents. Your firm, in effect, has 50 full-time equivalents and would be subject to the penalty if you don’t provide health-care coverage. However, your penalty cost likely would be zero because the $2,000 tally starts at the 31st full-time employee and you only have 25 full-time employees.

Q. What should I know about getting insurance for my employees?

A. You can’t just buy any old insurance to avoid the penalty. You have to provide so-called “minimum essential” and “affordable” coverage. Minimum essential coverage means covering 60% of the actuarial value of the cost of the benefits. And affordable means the premium for the coverage of the individual employee cannot exceed 9.5% of the employee’s household income.

If the coverage you offer is unaffordable, qualifying employees can get subsidized coverage through the tax credit on the state exchanges. In such a case, you will have to pay the lesser of $3,000 per subsidized full-time employee, or the $2,000-per-employee penalty after the first 30 full-time employees.