I received an interesting email from Global’s health insurance agent last week, which sent me on a consuming task to get to the bottom of the question, “What impact will the Patient Protection and Affordable Care Act have on our small business?” The PPACA, colloquially known by both political parties as Obamacare, has come into effect in pre-planned stages since 2010, but the biggest stage is yet to come in January 2014. That’s when all the provisions of the bill that affect the actual implementation of the individual mandate come into play. Other than the email from our insurance agent, I’ve not received any communications on this bill, advice on how it affects our business, information on the provisions, or instruction from any agency. All of the responsibility for the research appears to be on businesses, so I’ve rolled up my sleeves and gotten down and dirty trying to break this down for Ron, and I’ll share it with you, too.
Assuming everyone knows about the individual mandate and the requirement that proof of approved health insurance coverage be submitted to the IRS each tax year to avoid penalty, what I’d really like to get into is the impact on businesses, large and small, this new law creates. These provisions are based on company size, determined solely on the number of full-time employees, considered to work 30-hours or more per week, that the company employs. The provisions require businesses to report “full-time equivalent” employees which basically means you take all the part time employees, add them up, and however many “people” you get out of all the hours that are 30 or more count as one “full-time equivalent”. Two 15-hour per week employees = One 30-hour per week full-time equivalent. Three 20-hour per week employees = Two 30-hour per week full-time equivalent employees. Got it? It took me a few times and I consider myself to be pretty smart!
Now, if we were a company with over 50 full-time employees, or our primary owner had common ownership in several companies who combined had over 50 full-time employees, we’d be considered a “large” company under this act. Any company with 25 or less full-time employees is considered a “small” company under this act. We fit somewhere in the middle: all of Ron’s entities combined have about 32 full-time employees, though we’ve been as high as 40 and as low as 24 in recent years. Technically, having less than 50 employees we still fall in the “small” category, but you’ll see why I make the distinction between less than 25 and 26-49 employees in a moment.
Under Obamacare, how employers are required to handle health coverage for their employees is based on the business’s size. Large businesses with 50 or more employees are required to offer health insurance that is “affordable” and “acceptable” to all of its employees, even to those who qualify and elect government-subsidized plans. “Acceptable” health insurance has yet to be defined but the bill tells us “affordable” means the employees portion of the premium can be no more than 9.5% of the employee’s wages. If a large company elects not to provide coverage that meets this criteria they will face heavy penalties, including $750/employee for not offering coverage at all, or if they offer coverage that doesn’t meet the “acceptable” or “affordable” guidelines, the penalty will be $2,000/employee after the first 30 employees are excluded.
To address the “affordable” provision as it relates to our company, right now Ron pays 50% of our individual insurance premium and the remaining 50% is paid by the employee, as he has for years. (Thanks, Ron!) We’ve seen a dramatic increase in our insurance costs over the last two years as the mandates on the insurance companies have been coming into effect and they pass their increased administrative costs on to us, the consumers. In fact, we’ve had to change insurance companies twice and we’ve seen a significant decrease in the quality of available plans within our price range compared to just a few years ago. Right now, our individual coverage costs both Ron and the employee $43.23 per week. Using the 9.5% guideline and our current insurance rate (which is projected to go up again in January, per our agent) anyone in our company who makes less than about $12/hour would be paying more than 9.5% of their annual wages, never mind that their total household income may be significantly more; this calculation is based on the employee’s wages only.
In the interest of avoiding penalties and continuing to offer plans that have coverage our employees desire, I can guarantee that no matter what the future holds, Ron will absolutely never hire on additional workers to meet this 50 employee threshold. Why would our business voluntarily opt-in to taxes and penalties, provision requirements for providing specific health care, when it is not necessary? I think it’s clear how businesses on the cusp of becoming “large” will avoid doing so at all costs, and how the cost for hiring additional workforce has just increased exponentially. The cost to business for each employee now reaches far beyond salaries, vacation & sick pay, payroll taxes, FICA, FUTA, SUTA, and ever increasing health insurance benefits costs and now expands into the realm of requiring businesses to provide employee benefits that are “affordable” and “acceptable” as defined by the government, lest those businesses be taxed. Either large businesses pay more in salary to make the coverage “affordable” or they pay a larger portion of the coverage. If they can’t get the coverage “affordable” they have to pay the tax penalty. Increasing workforce to opt-in to that type of stronghold makes sense only in a few certain scenarios, and Ron’s company definitely doesn’t fit that bill. Even in a robust economy, the sales volume would have to be significant to offset such costs, and a sincere evaluation of cost vs. benefit would have to be reviewed before any payroll expansion could be made. Rest assured, Global won’t fall into that category, and I’m sure we won’t be alone. Many moderately-sized businesses are thinking the same way, and if you think job growth is stalled now, just wait until 2014 when business owners realize what hiring new employees above the 50 threshold does to their wallets.
So we won’t be a 50-employee “large” company, let’s just hang out where we’re at, maybe add a few more jobs, hover around 40 or so, and since we aren’t required, we could not offer health coverage to avoid any trouble, right? Not so fast. I still need to explain the phenomenal tax benefits to “small” companies with less than 25 employees who provide insurance coverage to their employees! If a “small” company pays a majority of the health premium for its employees (read: 51% or greater) then the company will receive up to a 50% tax credit on all premiums paid! Depending on average salaries of the employees, this means that there’s a glowing red seed of an idea in the back of many moderately-sized businesses when they start to analyze their healthcare options… what about cutting our workforce?
Here’s how that works for Ron’s company: If we can cut our workforce by 7 or 8 people and increase our employer portion of the premium by a small margin, not only are we exempt from the tax penalties, we’ve basically just received a 25% reduction in the employer’s health coverage costs on the remaining employees through tax credits. It might hurt a little, losing the staff, but the cost savings will be significant. Now that I’ve got our workforce shaking in their boots, know this: we aren’t the only ones thinking this way. Many other small companies who struggle to do the right thing by offering health plans to their few employees, who are just on the cusp of being considered “small” businesses under this new law if only they were a few employees less will also think the same thing. We can retain the best of our workforce, furlough the others, increase our benefits by paying more of the premiums for our employees, reduce operations and payroll overhead, receive major tax credit, and avoid harsh tax penalties in the process. The smaller picture answer seems clear: we may not have a choice but to take this route, as unappetizing as it may be for the decision makers. The larger picture results are astronomical: in addition to stalled job growth, the PPACA will absolutely cause increased unemployment. There will be more people losing jobs and less companies adding new positions. The bill clearly penalizes large companies and discourages growth, and encourages small companies to stay (or become) small to take advantage of tax credits. The cost to businesses hinges squarely on the shoulders of their workforce. Every prudent business owner will take a long, hard look at their employee numbers and make the choice: Stay the same? Grow? or Shrink? From my desk, I’m not seeing many benefits for employee numbers to grow where this bill is concerned so I’m deeply worried the answer for many businesses will be “stay the same” or “shrink” and that does not bode well for our unemployment or job growth figures in our country.
The individual mandate comes into effect in 2014, so why worry about it? Why is this keeping me awake at night right now?
The categorization of businesses into “large” or “small” types, the penalty calculations, the payroll figures that all of Obamacare hinges on is calculated based on 2013 payroll figures. That means decisions about hiring, firing, health coverage, and salaries needs to be made right now, not next year.
No matter who wins the election, 2013 is going to be a turbulent year for businesses, small and large alike. Whomever the President may be, he will have to answer to increased unemployment, stagnant job growth and continued economic downturn due to the provisions of this bill. There are actually some good things in the bill, but the discussion on the implementation of State insurance exchanges and the potential decrease in premiums that may eventually cause, availability of health coverage to individuals who do not have access right now, and the impact this bill has on the uninsured and insured alike will be saved for another day, because right now I need a cup of coffee.
Whether you’re a Democrat, Republican, or Independent it’s important to consider objectively the impact this new law has on all businesses, and by extension all employees, and by further extension, our economy as a whole. The lawmakers we elect have a much larger impact than many consider, as the bills they pass cascade down to every American. It must be stated that, contrary to popular belief, it is not a sin to vote against your registered party. Each and every elected official should stand on the merit of their policy, both promised and implemented, and making thoughtful, informed voting decisions are more critical than ever. It’s up to each of us as voting adults to consider the pros and cons for each side of an argument and make decisions that allow us to sleep at night, and hopefully we can improve the country as we do so.