What Health Care Reform Means for Small Business

How will health care reform affect small businesses? In quite a few ways, it turns out. We sifted through the bill to provide you with the most important small business-related facts.

How does the government define a small business? According to the federal government, a small business is company with fewer than 100 employees. Your state may define a small business differently, eg. as a company with fewer than 50 employees. Check with your state to be sure.

Who gets the most tax credits?
Very small companies (10 or fewer employees) with low-wage workers.

Who should worry? Companies with more than 50 employees–you won’t get any tax credits. Companies who provide their employees with “Cadillac” health insurance (it will be taxed at 40% starting in 2014). Anyone who likes to be sneaky about cutting costs–the gub’mint will issue handsome fines if they find you’ve avoided their insurance requirements.

Starting this year:

You can get a 35% tax credit if you have 10 or fewer employees, and they earn less than $25,000 on average.

You qualify for a smaller tax credit if you have 25 or fewer employees with an average wage $50,000 or less.

You don’t get a tax credit if you have more than 25 employees. Also, any employee who earns more than $80,000/year will be excluded from your credit.

Starting in 2014:

States must set up health insurance pools called SHOP exchanges (Small Business Health Options Programs). These allow small businesses to group together to buy health insurance.

You could receive a 50% tax credit if you’re a company with 10 or fewer employees who earn less than $25,000 on average.

You will be penalized $750 per full-time employee if you’re a company with 50 or more employees, and you don’t provide health insurance. The government won’t charge you for the first 30 workers you don’t cover.

You will not be penalized if you have fewer than 50 employees.

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You face additional fines if you don’t cover 60% of overall employee health costs, as well government-defined set of services.

If you pay more than $10,200 per year
for your individual employee’s health coverage, or more than $27,500 for family health coverage, the government will charge your insurer a 40% excise tax on the portion you pay that exceeds the amounts above. That means higher premiums for you–or your employees. Dental and vision isn’t included in the tax.

How much do you have to cover?

If you offer your employees health insurance:

* You must cover no less than 72.5% of the cheapest health plan you offer for individuals, and no less than 65% for families.
* You must automically enroll every employee in a health plan with the lowest employee premium, unless they opt out.

If you choose not to provide health coverage:

*You must pay the Health Choices Commissioner (the person in charge of the SHOP exchange fund) 8% of the average wages paid during a predefined period of enrollment. They charge you a lower percentage if your annual payroll is less than $400,000.

They bust you if:

*You don’t cover your employees and don’t pay your SHOP fee. You’re fined $100 per violation day.
*You try to entice a high-risk (sick) employee away from company-provided insurance and towards the SHOP to try to save yourself money.

Also note:

If you operate as a partnership, each partner counts as an employee.

There are a few House amendments that the Senate may pass this Sunday. If they pass, it means that:

-The penalty for not providing insurance will go up to $2,000.
-Part-time employees will count towards that 50 employee limit.
-If you buy your employees “Cadillac” coverage, you won’t face that 40% tax until 2019.

  • While these bills have provisions that impact small businesses they are not that drastic. The reform really represents some tweaks to health insurance regulation. Annual premium increases of 20-30% are the problem and these bills offer little to control costs.


  • Nancy

    What if you are a Schedule C individual business? Do you qualify for the small business tax credits, or must you be incorporated to qualify?

  • Kathryn

    Ditto – I’m a sole proprietor with no employees but pay a lot for high risk health insurance. Will I qualify for tax credits??

  • Susan

    The tax deduction-kicking in in 2010, will not be available for sole proprietors…time to incorporate. But self-employed earning up to 400% of poverty-thats $88,000 for a family of 4 can receive a subsidy to offset the cost starting 2014 also you can join a SHOP starting 2014 to help lower the cost.

  • Norris Hall

    Quote: “Companies who provide their employees with “Cadillac” health insurance
    (it will be taxed at 40% starting in 2014).”

    I believe this is incorrect information. The 40% tax won’t start until 2018.

  • Dan

    There seems to be a large problem with the health care bill’s impact on businesses. Most businesses with relatively low-income workers (restaurants, hotel industries, nursing facilities, etc.) offer health insurance to employees and the majority of these employees do not elect to enroll. If the business is required to have these employees enroll in the corporate health benefit plans, costs for U.S. small and mid-size businesses, which are the economic drivers of growth, will see their costs increase dramatically. In fact, enough to bankrupt many companies. The tax credit subsidy does little to counter the substantial cost increase. I’m curious as to why this factor was not and is not subject to more public discussion. Also, I would welcome any thoughts on the subject.

  • wow one word awesome…

  • Section 313 of the bill “EMPLOYER CONTRIBUTIONS IN LIEU OF COVERAGE., SMALL EMPLOYER subsection, reads, “the term “small employer” means any employer for any calendar year if the annual payroll of such employer for the preceding calendar year does not exceed $400,000.”

    Do we intrepret this to mean employers of less than 50 employees will be required to contribute to the SHOP exchange based on a payroll sliding scale?

  • Nice article, and I agree that it is can be difficult to access the health tax credit.

    But, I would like to point out an additional way to access the health tax credit: combining a limited medical benefits program with a high deductible HMO.

    The limited medical benefits program generally won’t qualify for the health tax credit, but wrapped with a high deductible HMO, the package may qualify and be affordable.

    I go through a general example here: http://www.franchise-info.ca/supply_chain/2010/07/Small-business-tax-credits.html

  • All of you make very interesting points however if utilized correctly the healthcare reform can help small businesses immensely when coupled with a Professional Employer Organization (PEO). PEOs can shelter small businesses from health increases. PEOs are well versed in all aspects of the healthcare reform and can help small businesses understand the new policies as well as get them the maximum tax credit for each business.