When the Patient Protection and Affordable Care Act (PPACA) was passed earlier this year, proponents said one benefit was that it would help small businesses afford healthcare for their employees.
Will that prove to be true? Let’s consider five key measures that will have an impact on small businesses.
Small business tax credit
This is the big one. Small business owners, who have long struggled with the cost of providing healthcare coverage for their workers, would gain relief in the form of a tax credit.
Unfortunately, there are a lot of “ifs” in determining whether or not the tax credit applies to your business. For example, if a business has fewer than 25 full-time-equivalent (FTE) employees, and if the average wage is less than $50,000, then a credit of up to 35 percent of healthcare premiums might apply in 2010.
However, if the number of FTEs tops 10 and the average wage exceeds $25,000, the tax credit is reduced on a sliding scale. So, the full tax credit applies to firms only with ten or fewer FTEs, and with average wages of $25,000 or less.
The tax credit doesn’t apply to most business owners. According to the IRS: “A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit.” Family members are excluded as well.
The tax credit will go up to 50 percent of healthcare premiums for qualified businesses by 2014. However, it must be noted that the small business tax credit is temporary. Starting out, it’s available for up to five years. But once the legislation’s insurance exchanges are operating in 2014 (more on these below), the tax credit is available only for two years.
Play or Pay
Starting in 2014, firms that meet the following conditions must pay a fee: They have more than 50 employees, they do not offer healthcare coverage, and at least one of their full-time employees is enrolled in a plan using a tax credit or other subsidy.
Businesses who meet these criteria will pay an annual penalty of $2,000 for each full-time employee over the first 30. The incentive for some businesses to keep their payroll below 50 employees or reduce the number of workers to fewer than 50 is clear. Starting 2014, self-employed individuals are also required to obtain coverage or pay a penalty.
The insurance exchanges promised under healthcare reform, which will be run by state governments or nonprofit institutions, are called the American Health Benefit Exchanges and the Small Business Health Options Program (SHOP). By 2014, individuals and small businesses of up to 100 employees will be able to purchase insurance through SHOP exchanges; by 2017, businesses with more than 100 employees will be able to. The official health care reform site says: “Small businesses will benefit from insurance with lower administrative costs compared to the choices available in the small business market today because they will be able to pool together.”
However, the government sets the rules and regulations governing insurance offered in these exchanges. Insurance exchanges may make it easier to impose new regulations and mandates.
Medicare payroll tax increases
Healthcare reform will be paid for, at least in part, by increased Medicare payroll taxes for upper-income earners. Starting in 2013, for individuals earning $200,000 annually and couples $250,000, the total Medicare payroll tax will be increased from 2.9 percent to 3.8 percent. This tax will also be applied to investment income.
The expanded 1099 reporting requirement
Right now businesses must send and file 1099s for payments to non-corporations exceeding $600 that cover non-employee services, interest, dividends, and rent. Beginning in 2012, this requirement will be expanded to cover all payments (including corporations) in excess of $600 for all services and merchandise.
This mandate, of course, has nothing to do with healthcare. Instead, it’s an effort to expand government revenues by making sure that these payments received have been properly reported as income.
However, the burden on businesses boggles the mind, given the number of purchases made by each firm in a year that meet the $600 threshold. It’s hard to imagine how businesses or the IRS will handle the resulting inevitable avalanche of paperwork.
Raymond Keating is the Chief Economist of the Small Business & Entrepreneurship Council, and the co-author of D.C. By the Numbers: A State of Failure.