Affordable Care Act

The Patient Protection and Affordable Care Act was passed by Congress and signed into law by President Obama on March 23, 2010. Together with the Health Care and Education Reconciliation Act Amendment, the law completely replaced the existing health care system in the United States, expanding Medicaid and Medicare into a universal health insurance overage system, mandating all individuals to sign up for either privately or public funded health insurance.

One important concern with the Patient Protection and Affordable Care Act by the media and the bill’s adversaries is that “Obamacare” will kill Small Business [1]. The visible effect of Obamacare on small businesses is not necessarily seen in the abandonment of plans to grow businesses or death of businesses themselves, but, rather, in the slowing or decrease in hiring of employees and cutting of employee hours. According to a Gallup and Wells Fargo survey of small business owners, conducted in 2012, 48% of small business owners point toward "potential healthcare costs" as a reason for not hiring more employees [2]. Still while the ACA may have caused a slowing or ceasing in small business hiring, the actual harm of Obamacare regulations and mandates to small businesses still depends heavily on small business size because the effect of Obamacare on small businesses varies so vastly between firms of different composition and size within their workforces (i.e. number of full time employees, average wages, state where the business is operated).

While the SBA has established a summary of the size guidelines for small businesses to qualify "as a small business concern for SBA and most other federal programs" [3] (500 employees for mining and manufacturing businesses and an annual receipt of $7.5 in average annual receipts for non-manufacturing firms), the specifications vary between industry. Also, while United States has almost 6 million small businesses that fall under these size restrictions, 90% of these small businesses employ fewer than 20 people [4].

Furthermore, although the cost of providing health care insurance has assuredly risen since the ACA'S enactment, health insurance premiums had already been steadily increasing for many years [5] [6].

How the ACA really affects small businesses

The Affordable Care Act uses the language “full-time equivalent” (abbreviated FTE) when determining the number of full-time employees.

Calculation for finding the number of full-time equivalent employees: # of FTE's = Total Number of Full-time Employees + [Combined Number of Part-time Employees Hours )/ 30]

A full-time employee is any employee who worked on average more than 30 hours a week for more than 120 days in a year [7].

Another criterion for determining mandate-exemption or tax-credit status in the ACA is the average annual wage of employees: Average Annual Wage = Total Wages Paid by an Employer / Number of FTEs, rounding down to the nearest $1,000 [8].

The employer mandate of the ACA is passed onto larger small businesses - firms with larger than 50 FTE (full time equivalent employees) - but many of these larger businesses also already offer health insurance coverage for their employees.

Small businesses with fewer than 50 FTE

Despite all of the backlash the Patient Protection and Affordable Care Act, or Obamacare, has received for its perceived potential destruction on small businesses, for the most part, small businesses with under 50 full time employees are not greatly burdened by the ACA. In fact, companies with fewer than 50 employees, which make up a large portion of small businesses, are not penalized at all for not providing health care to their employees.

Thus, if employers with fewer than 50 FTE find themselves unable or unwilling to accommodate the rising costs of health care, they can simply opt out of providing employee-sponsored health insurance. Those who do decide to provide employer-sponsored health insurance will have to deal with the issue of rising premiums and other slightly increased regulations, as a result of the comprehensive and affordable minimum coverage plan quality accepted by the ACA.

Regulations that affect small businesses with fewer than 50 FTE

Although small businesses with fewer than 50 employees are not mandated by the ACA for to provide health care insurance to its employees, there are some additional regulations and provisions associated with the ACA that increase the cost of providing and receiving health care for firms that do choose to do so. The ACA:

Requires employers to provide their employees with a Summary of Benefits and Coverage Disclosure Rules (SBC’s), a standard form that essentially explains to employees what their plan entails (noncompliance may result in a further penalty).
Caps the maximum contribution an employee can make toward a flexible spending arrangement at $2500
Increases Medicare withholdings on employees with wages over $200,000 and $250,000 for married joint filers
Assesses net investment income for Medicare (taxable capital gains, dividends, rents, royalties, and interests) for single filers with a Modified Adjusted Gross Income of $200,000 for a single filer (and $250,000 for married joint filers)
Institutes a 90-day maximum waiting period for employees to provide health care coverage employees who are eligible, as well as penalties for surpassing the 90-day period.
Incentivizes employers, using inducements, such as as subsidies on health insurance plans, to offer Workplace Wellness Programs that satisfy the federally accepted requirements.
For employers that sponsor self-insured plans, requires another information reporting that is separate from the information reporting required for employers with more than 50 FTE [9].

Options for small businesses with fewer than 50 FTE that still choose to provide health care

Although, health care is not a mandatory service for small businesses with fewer than 50 FTE many small businesses still provide health insurance for their employees. These companies, along with large companies, are seeing rising premiums on their insurance due to the ACA stipulation that health care companies cannot deny coverage when considering an individual's health. However, there are options to compensate with the increased (while also non-mandatory) cost of providing health care, the most obvious of which would entail the end of employee-sponsored health insurance coverage by small businesses or simply increasing the employee contribution to coverage. Small businesses can try to save on rising health care costs in various ways, such as :

participating in the SHOP Exchange
negotiating on private insurance plans
converting their employee group plans into individual employer-sponsored plans, such as Health Savings Accounts or Health Reimbursement Accounts (HSA’s and HRA’s)
switching to direct primary care
using Workplace Wellness Programs

[10].

Small Businesses with More than Fifty Employees

Small businesses with fewer than 50 FTE are exempt from the penalties of ACA; however, as soon as a company reaches the 50th employee mark, the hire becomes much more expensive, possibly dis-incentivizing small businesses from expanding their labor force. Firms that employ 50 or more workers and choose not to provide health insurance coverage must pay a tax penalty of $2,000 for each uninsured employee beyond the first 30. Furthermore, firms with more than 50 workers must contribute, at a minimum, 60 percent of the cost for individual minimum essential coverage. [11]. This increased marginal cost we see for the 50th employee serves as the reason why many critics of the ACA believe that the ACA is killing jobs, and also why many small business owners may have concerns about expanding their businesses.

According to a survey conducted by the Society for Human Resource Management of more than 600 small business owners:

More than four out of ten small business owners have delayed hiring due to uncertainty about the effects of the ACA [12].
One in five small business owners reported that they have cut their number of employees [13]

The Society for Human Resource Management also found that about one in five small businesses are reducing workers' hours to part time because they are not required to offer coverage for employees who work less than 30 hours per week. These part-time employees are eligible for subsidized coverage in the new health insurance exchanges offered through the ACA [14].

Companies with between 50 to 99 employees are required to provide health insurance coverage to their employees, but the penalties imposed for not complying with the ACA requirements were delayed until 2016. The penalty for companies with more than 99 employees was delayed until 2015. As a result of these delays, it is not entirely possible to fully understand and analyze the exact effects of the ACA on small businesses that are required to provide health insurance to its employees.

SHOP Exchange

The SHOP Marketplace or Exchange (Small Business Health Options Program, is a provision of the ACA designed to help small businesses get lower health insurance rates using group plans and also to claim tax credits.

The SHOP exchange did not open up to employers with fewer than 50 FTE until 2015 and only just opened up in 2016 to businesses with 100 FTE or less. SHOP allows for increased employer choice functions, enabling employers to choose from a larger field of available coverage options for employees [15]. However, the financial advantage in using the SHOP exchange is uncertain, as insurers in the marketplace regardless will still not be allowed to charge premiums based on health status, and workers using the SHOP exchanges, will become ineligible for subsidies when they buy their own insurance [16]. What SHOP does offer small businesses is increased buying power in the group-plan market (an advantage only larger firms used to possess) and a simpler way to compare prices, coverage, and quality of plans [17].

Small Employer Health Insurance Tax Credit

There is also a temporary health insurance tax credit available to firms with 25 or fewer employees and making less than $50,000 in annual wages, but many firms do not meet the strict requirements necessary for obtaining the tax credit that would cover up to 50% of employer contributions to employees' health insurance premiums (up to 35% for tax-exempt employers):

Firm must employ fewer than 25 full-time equivalent (FTE) employees
Average employee salary is $50,000 per year or less
Employer covers at least 50% of full-time employees' premium costs (coverage is not required for part-time employees)
Coverage for full-time employees must be purchased through the SHOP Marketplace

Additionally, only employers with 10 or fewer FTE with annual wages of less than $10,000 can qualify for the full tax credit that covers up to 50% of their share of employee premiums; "the smaller the business, the bigger the credit" [18].

The health insurance tax credit became available to firms in 2014 [19]. The tax credit is incredibly under-inclusive, and according to the National Federation of Independent Businesses, only one in three small businesses qualify [20]. Of the estimated 1.4 to 4 million small businesses that were eligible for the wide range of tax credits, only 181,000 actually claimed the Small Employer Health Insurance Tax Credit in 2014.

According to Holly Wade, the director of research and policy analysis for the NFIB Research foundation, "the small business tax credit is a better talking point than it is a financial incentive for small businesses" [21].

2016 Election Candidates’ Positions on the ACA

The three remaining Republican candidates in the 2016 Presidential Election, Ted Cruz, John Kasich, and Donald Trump are largely united on the issue of health care reform in that they all have plans to appeal the Affordable Care Act if elected President, opting for free market tactics in the health insurance industry – allowing individuals and employers to continue to opt in or out of privately offered health insurance. The Republican Candidates promise to expand coverage, improve health care quality, lower drug and other medical costs, and even increase transparency in the health care market [22].

Meanwhile on the other end of the political spectrum, Democratic Candidate Bernie Sanders goes so far as to say that he wants to expand the ACA into a Medicaid-for-all system, which could completely remove employer-sponsored health care from the equation. Democratic Candidate Secretary Hillary Clinton has been an advocate of universal health care ever since she proposed her own health care reform plan in the 90’s and is now running with the intention of defending and building upon the ACA. In an interview with AOL.com on January 27, 2016, she expressed that “Health care is a basic right. We are 90 percent covered, we gotta get to 100 percent, and then we gotta get cost down and make it work for everybody. And even though we didn't get it then, we've got it now and I'm going to defend it and improve it" [23].

Conclusion

There remains a lot of uncertainty as to the specific effects of the ACA on small businesses because of the many delays and exemptions in the rollout process and implantation of the ACA’s mandates and provisions. By extrapolating from the status quo and general trends of the health insurance market, the ACA will most likely not turn out to be the “job-killer” or “enemy of small business” it was predicted to be. And largely, there is not significant evidence signaling that the ACA is devastating small businesses and startups with fewer than 50 full time equivalent employees.

In fact, the head of the CBO Douglas Elmendorf said, “We don’t think that the healthcare law is having a significant impact on the economy today… It would reduce the amount of labor used in the economy by about a half a percent at the end of the decade… but, most of that is people choosing not to work because they can obtain health insurance at an affordable price outside of the workforce” [24]. John Arensmeyer, founder and CEO of the Small Business Majority, in a statement reported by Fox News, said that “The Affordable Care Act tackles small business owners’ top priorities when it comes to health-care reform: cost and accessibility. The law will significantly rein in costs while providing more health coverage options for entrepreneurs.” [25].