How Health Care Reform Will Impact Your Small Business

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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The new health insurance reform legislation signed into law this week adds both new requirements and new perks for small businesses. Sorting out one from the other is proving a little difficult for business owners. In many cases, the implications of the law will take some time to understand, especially as it isn't entirely clear how some provisions of the bill will actually be implemented.

The Size of Your Business

For small business owners, just about everything in the new legislation is based on the size of the business. Tax breaks are available for any business with fewer than 25 employees and that pays average annual wages of less than $50,000. Sam Gibbs, the senior vice president of sales at eHealthInsurance, breaks down the tax credits:

For tax years 2010 through 2013, you’ll get a 35% tax credit for the amount you contribute toward your employee’s health insurance premiums. But, you have to currently be covering 50% (or more) of the total premium cost for your employees. If premiums in your area are extremely high, you may still qualify for the tax credit if you’re covering 50% of a "benchmark" premium set by the Department of Health and Human Service (that benchmark is not available yet).

However, it is not necessary for smaller businesses to actually offer health insurance even after 2014.

There are some concerns about what the bill will mean for businesses considering hiring their fiftieth employee. It seems likely that the requirement to offer coverage at that point will lead some small businesses to slow growth or put off hiring. Amanda Austin, the director of federal public policy at the National Federation of Independent Business, told the Wall Street Journal:

The tax credit itself is limited by a firm’s size and wages, so if you want to remain eligible, you need to remain small and not pay high wages.

More Than 50 Employees

If your business has more than 50 employees, offering health care coverage will become mandatory in 2014. Those businesses who do not offer health insurance will pay a penalty of $750 a year for each full-time employee without coverage. That number wasn't picked out of thin air, though. Gibbs notes:

The Congressional Budget Office estimates that health insurance for individuals in the small group market will cost $650 per month and $1,333 per month for families by 2014.

There is a proposal on the table in the Senate to increase that penalty to $2,000.

One of the biggest concerns for small businesses, especially those with more employees, are the ever-increasing costs of health insurance. According to the White House's questions and answers for small business owners, small business owners currently pay up to 18 percent more than larger companies for identical health insurance policies. The new legislation is intended to bring down those costs by minimizing administrative costs, offering a tax credit and creating a health insurance exchange.

The fact of the matter, though, is that health insurance costs have been rising for years and it seems unlikely that trend will end. In an interview with the Wall Street Journal, Samantha Lapin, the president of POD Inc, expressed concern that her company's insurance premiums have increased up to 15 percent a year over the past decade. She owns a small computer-services company in Albuquerque, NM, that employs 60 people. Lapin says:

The big disappointment is there’s nothing in this bill to prevent our rates for continuing to increase the way they have.

Taxes for Entrepreneurs

As an entrepreneur, the effects of the new legislation on your taxes may prove to be problematic. If your earnings exceed $200,000 (for an individual) or $250,000 for a couple, the Medicare hospital insurance tax on your wages will increase by 0.9 percent, to 2.35 percent in 2013. There are other taxes currently under consideration in the Senate that could make for an even more uncomfortable tax position. However, there is enough time before the increase takes affect to talk to a CPA or tax professional and find some ways to reduce your tax burden.

More Paperwork for Business Owners

While taxes may hit many small business owners, the largest impact may be the increase in administrative costs when it comes to managing employees' health coverage. Even the W-2 will become more complex, because you'll need to report the value of each employee's health plan on their W-2 statement. The IRS is also planning to look harder at all tax paperwork in an effort to improve tax collection and pay for health care reform. You'll be expected to complete 1099 forms for all payments of $600 or more to corporations (currently, 1099s are only required for payments to unincorporated businesses).

Don't be surprised if you find yourself needing to keep more in-depth records, which in turn requires more time and expense on your part. It's a simple fact of the new legislation and there's not a way around it.

Finding Options Beyond What is Available Today

So far, there aren't a lot of hard and fast numbers on what this will mean for small business owners. It's reasonable to expect that health insurance providers will be looking for opportunities to work with small businesses and, in fact, the legislation will create state-based exchanges that will make it easier to purchase health coverage. Other opportunities are likely to become available, especially if you're willing to explore the options. It's also important to talk to your employees about the type of coverage they feel that they need and how to effectively offer it to them — and don't be surprised if different employees have different requests. Age, activity levels and even the type of work your employees do will affect their needs. Gibbs suggests exploring options beyond offering a one-size-fits-all plan:

In satisfaction surveys, individual insurance policyholders like their coverage better than people on small group plans, so it’s worth talking to your employees about all of their health insurance options.

There are a variety of health insurance options out there and it's likely the numbers will increase in the next few years. Spending time and consideration on the question can provide you with a solution that is not only cost-effective for your business but satisfies your workforce and guarantees their health.