It's not always easy to be the small fish in a large pond. Consider the field of health insurance -- that's a big business, and it's made for other big businesses. When a large company approaches an insurer, it brings along a large risk pool in the form of its many employees, which makes it easy for the insurer to spread the risk and keep premiums low. Small businesses aren't able to provide that big risk pool, and so they face much higher premiums and insurance costs. The small fish has no bargaining power to keep the big fish from taking it for a ride.
According to the White House, small businesses pay premiums that are 18 percent higher than those of large businesses. Much of this higher cost can be attributed to administrative costs that are three to four times as much as a large company's administrative costs. And there's nothing protecting a small business owner from seeing insurance premiums skyrocket when just one employee gets sick. These high costs and discriminatory measures make it impossible for some small business owners to offer insurance to their employees, which can prove frustrating in the competition for the best and brightest workers.
Small businesses, therefore, had a lot at stake in the recent battle over health care reform. The new Affordable Care Act includes several measures aimed at relieving the financial stress that these small businesses face. Some of the benefits won't be available until 2014 -- that's when the health insurance exchanges will open. These exchanges are designed for businesses that have fewer than 100 employees; when a bunch of these "little fish" get together, they become the equivalent of the big fish that currently has an easier time procuring affordable insurance. Insurers who take part on the exchange will be compelled to offer competitive plans to stay in business, but regulations in the new legislation ensure that the plans won't be second-rate. This new insurance system will cut those high administrative costs that small business owners are up against, and new regulations will also prohibit insurers from jacking up the costs of a group premium when one person gets sick.
Some benefits, though, are available now. On the next page, we'll take a look at the new tax credits for small businesses that provide health insurance.
Small Business Tax Credits
Despite the fact that small firms pay more in premiums than large companies do, many small business owners have shouldered those costs to provide insurance for their employees. To reward those owners, and to entice more small businesses to offer insurance now, the Affordable Care Act includes a tax cut for people who own small businesses. The White House estimates that 4 million small businesses could qualify for this tax cut; the administration also estimates that the tax break could provide $40 billion in savings for these businesses over the next 10 years [source: White House].
To be eligible for the maximum tax credit, the business must be comprised of 10 or fewer full-time employees, and average annual wages must be less than $25,000. Businesses of 25 or fewer full-time employees and average annual wages of less than $50,000 are also eligible for a lesser tax cut. In either case, the employers must contribute at least 50 percent to the total premium cost. From now until 2013, these employers are eligible for a maximum credit of 35 percent of their contributions toward the workers' insurance premiums. Non-profit businesses are also eligible for the tax credit if they meet the other qualifications, but their tax credit maxes out at 25 percent of the employer's contribution toward premiums. In 2014, the tax credit becomes even larger -- the maximum credit will be 50 percent (35 percent for tax-exempt businesses). The 50 percent tax credit is available for two years.
The White House uses the example of a small-town mechanic who owns his own business to explain how the tax credit would work. If the mechanic has 10 full-time employees who are paid a total of $250,000 ($25,000 per worker), the mechanic is eligible for the maximum tax credit. If the mechanic pays $70,000 toward premiums, then his tax credit in 2010 would be $24,500, while his tax credit in 2014, when the tax credits increase, would be $35,000. A quick caveat: The owner of the small business can't be included in the count of full-time employees, and neither can close family members of the owner. Information on calculating your own tax credit can be found at irs.gov.
The National Federation of Independent Businesses, a lobbying group, complains that this tax credit only helps very small businesses. Still, many small businesses are eligible for some percentage of the credit, and the White House is hopeful the credit will help those businesses until 2014, when the exchanges open. Ideally, this new access to affordable health insurance will help more small businesses provide coverage, which could make working at a small firm -- or starting one up -- more appealing to more Americans, who may be afraid to leave their jobs lest they lose their insurance.
For more on the Affordable Care Act, see the links on the next page.
- DeMause, Neil. "What health care reform means for your business." CNN. March 22, 2010. (Aug. 26, 2010)http://money.cnn.com/2010/03/22/smallbusiness/small_business_health_reform/
- "Fact Sheet: Small Business Health Care Tax Credit." White House. April 1, 2010. (Aug. 26, 2010)http://www.whitehouse.gov/the-press-office/fact-sheet-small-business-health-care-tax-credit
- HealthCare.gov Web site. U.S. Department of Health and Human Services. (Aug. 26, 2010)http://www.healthcare.gov/
- IRS Web site. (Aug. 26, 2010)http://www.irs.gov
- Jost, Timothy. "Implementing Health Reform: The Small Employer Tax Credit." Health Affairs. May 18, 2010. (Aug. 26, 2010)http://healthaffairs.org/blog/2010/05/18/implementing-health-reform-the-small-employer-tax-credit/
- Khan, Human. "Will New Health Care Law Really Help Small Businesses?" ABC News. April 1, 2010. (Aug. 26, 2010)http://abcnews.go.com/Politics/Business/obama-touts-health-care-bills-tax-credit-small/story?id=10261138
- Lerman, David and Liz Smith. "Small Businesses Skip the Health-Care Tax Credit." Business Week. Aug. 26, 2010. (Aug. 26, 2010)http://www.businessweek.com/smallbiz/content/aug2010/sb20100825_366429.htm
- Montgomery, Lori. "Millions of small businesses could be eligible for health care tax credits." Washington Post. May 17, 2010. (Aug. 26, 2010)http://www.washingtonpost.com/wp-dyn/content/article/2010/05/17/AR2010051701441_pf.html
- Pickert, Kate. "Understanding Five Immediate Benefits of Health Reform." Time. April 21, 2010. (Aug. 26, 2010)http://www.time.com/time/specials/packages/article/0,28804,1983409_1983408_1983405,00.html
- Pickert, Kate. "Why Small Business Groups Oppose the Health Bills." Time. Nov. 13, 2009. (Aug. 26, 2010)http://www.time.com/time/nation/article/0,8599,1938885,00.html
- Seelye, Katharine O. "Employer Mandate Becomes Sticky Issue in Reconciling Bills." New York Times. Oct. 31, 2009. (Aug. 26, 2010)http://prescriptions.blogs.nytimes.com/2009/10/31/employer-mandate-becomes-sticky-issue-in-reconciling-bills
- "The Affordable Care Act: Increasing Choice and Saving Money for Small Businesses." White House. (Aug. 26, 2010)http://www.whitehouse.gov/files/documents/health_reform_for_small_businesses.pdf
- "The Economic Effects of Health Care Reform on Small Businesses and their Employees." White House. (Aug. 26, 2010)http://www.whitehouse.gov/administration/eop/cea/Health-Care-Reform-and-Small-Businesses