Barbara’s Blog

Remember the promise made during the health care debate that “if you like your health care coverage, you can keep it?” Now it seems that fewer than 20% of small businesses will be able to do so.

The Administration estimates that 43 million individuals covered by plans of small businesses will probably lose existing coverage because of how the so-called grandfather rule has been defined.

What’s the grandfather rule? Under the Patient Protection and Affordable Care Act, insurance plans in effect on March 23, 2010, can be retained indefinitely (the plan is “grandfathered”) if they satisfy certain requirements. Businesses with plans that fail to satisfy the grandfather rule will have to obtain new, more expensive, coverage (they will be more expensive because they will have to include certain benefits not currently mandated).

More …

Interim final regulations detail how to remain a grandfathered plan. The plan will not be grandfathered if any of the following occurs:

• There is a decrease in the types of benefits covered by the plan (e.g., eliminating special benefits for diabetics).
• There is a significant increase in co-payments, which is defined as more than the greater of $5, adjusted annually for medical inflation, or a percentage equal to medical inflation plus 15 percentage points (e.g., a co-payment increase from $30 to $50 over the next two years would cause the loss of grandfathering).
• There is a significant increase in plan deductibles, which is defined as no more than a percentage equal to medical inflation plus 15 percentage points (e.g., if medical inflation is 5%, then the deductible cannot increase by more than 20%).
• There is a substantial increase in the cost of coverage borne by employees by decreasing the employer’s share (e.g., decreasing the employer’s share by more than 5 percentage points).
• There is a change in insurance companies, even if comparable insurance is purchased.

What to do now?

Review the details of the grandfather rule in a fact sheet from HealthReform.gov. If you currently have health coverage for your business, before you make any changes, consult with an expert who understands the new grandfather rule.

Your insurance agent may not be the right expert (although some may master the new rule).  You may want to review your proposed changes with your accountant.

2010 is almost over and 2011 is about to begin. With it brings the 112th Congress and a shift in control. What will all of this mean for small business over the next couple of years?

Some changes in Washington to note:

• The new head of the Small Business Committee is Rep. Sam Graves (R-Mo), who five times has been named “Guardian of Small Business” by the NFIB.

• Among the new members of Congress are a number of small business owners. NFIB boasted that 25 members of the 112th Congress are NFIB members.

My small business agenda

Here’s what I’d like to see Congress address in the new session:

• Repeal 1099 reporting that was enacted as part of the Patient Protection and Affordable Care Act of 2010. This law, which is set to take effect in 2012, requires businesses to report payments for all goods and services totaling $600 or more annually; it’s an administrative nightmare for small businesses. Repeal should be completed as soon as possible to avoid the need for businesses to get their accounting systems ready for reporting, an action that would be a waste of money if repeal eventually does happen.

• Enact permanent estate tax law. While the recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides two years of favorable estate tax law (a $5 million per person exemption amount, plus a 35% estate tax rate), the law for 2012 and thereafter is uncertain. The uncertainty means that business owners will continue to engage (and pay) planners for assistance in minimizing estate taxes in order to preserve their business interests for their families.

• Make the research credit permanent. The 20% credit for increasing research activities is highly valued by small businesses that spend money on R&D. The new law extended the credit for 2010 and 2011, representing the 14th time that it has been extended since enactment in 1981.

• Revisit health care reform. To date, the new health care law has done nothing to reduce health care premiums for small business owners. Congress should scrap the massive reform package, weighted down with high government costs (translation, high taxes needed to pay these costs) and find remedies to keep premium costs down. For example, previous suggestions of association health plans should be revisited. Also, allowing self-employed individuals to deduct their premiums as a business expense would save them more than 15% annually (through a reduction in self-employment taxes).

Attitude shift

Congress has paid lip service to the value of small business in the U.S. economy. It’s time for a real shift in attitude that can be reflected in actual change that is favorable to small business.

Do you qualify for a federal tax credit under the new health care reform package? The top credit is 35% of the premiums you pay, but it’s not easy to make a guess whether you qualify for the credit. You have to run through a series of questions to make a real determination. The IRS recently provided guidance to help you find out if you qualify this year. 

Steps to determine your eligibility
If you want to know whether you qualify, then complete these five steps, which have been created by the IRS:

1. Determine the employees who you take into account for purposes of the credit. Not every worker qualifies (e.g., your child won’t).
2. Determine the number of hours of service performed by these employees.
3. Figure the number of your full-time equivalent employees (FTEs). The number of your FTEs is figured by dividing the total hours of service of an employee by 2,080.
4. Determine the average annual wages paid per FTE by dividing wages to employees by the number of FTE; round down to the nearest $1,000.
5. Determine the premiums you’ve paid that are taken into account for purposes of the credit. These can’t exceed the average premiums for small employers in your state.

Small businesses that don’t qualify
The credit is supposed to apply to small employers with 25 or fewer full-time equivalent employees (FTEs) for the year who have average annual wages of no more than $50,000 per FTE. However, the phase-out of the credit amount operates in such a way that an employer with exactly 25 FTEs or with average annual wages exactly equal to $50,000 is not eligible for the credit. 

Even though you provide coverage for your staff and yourself, you aren’t included in determining eligibility. The law says that sole proprietors, partners in a partnership, shareholders owning more than 2% of an S corporation, and any owners of more than 5% of any other businesses are not taken into account as employees for purposes of the credit. Also, family members of such owners and partners are also not taken into account as employees. Further, seasonal workers are also disregarded unless they work more than 120 days during the year.

Get help
If the foregoing sounds complicated, you’re not stupid; it is.

• Find answers from the IRS to frequently asked questions about the credit here.
• Use an online calculator to help you figure the credit.
• If you think you may qualify for a credit (or qualify if you pay a little more in premiums), then talk with your accountant and work out the details for your situation.

The Patient Protection and Affordable Care Act of 2010, which was signed into law on March 23, 2010, and corrections to the Act, which were signed into law on March 30, 2010, will certainly change the health care landscape for small business owners. The big question is whether health care reform will make things better or worse. The answer—it’s too early to say, but things aren’t looking good.

What’s good

Competitive edge in hiring. Many small business owners have been unable to afford health care for their staff, which has put them at a competitive disadvantage to larger companies offering health coverage when it comes to hiring top talent. With everyone required to obtain coverage (when this rule takes effect in 2014), small businesses may be able to attract and retain good workers; individuals working for a small business who can’t afford health coverage will receive government assistance for this.

No mandate for health coverage. Congress chose to limit the burden on employers to provide affordable health coverage to those with more than 50 employees, starting in 2014. Smaller employers, while encouraged to provide medical coverage, aren’t required to do so.

What’s bad

Costs won’t come down soon. The biggest gripe among small business owners when it comes to buying coverage is cost. Unfortunately, the new law does nothing to bring down the cost now.

For some small businesses that have so-called “Cadillac” plans, starting in 2013 insurance companies will likely pass on to consumers (these small businesses) the 40% excise tax that they will have to pay.

Taxes will rise. The law has built-in tax hikes that will affect successful small business owners:

• Starting in 2013, the Medicare portion of self-employment tax will increase by 0.9% on earned income over $200,000 ($250,000 for joint filers.
• Also starting in 2013, there is a new unearned income Medicare contribution of 3.8% on investment income of those with adjusted gross income over $200,000 ($250,000 for joint filers).

Tax incentives are illusory. The law creates a tax credit for certain small businesses that provide health coverage for employees. The problem with the credit is that it is limited in eligibility and in time. For example, only businesses that employ 25 or fewer workers and pay them on average $25,000 or less get the full credit; a partial credit applies if workers are paid on average up to $50,000. No credit applies to firms with more than 25 employees. And the credit has a limited duration—four years under the first phase; up to two years under the second phase (only for coverage purchased through the state).

What remains to be seen

Whether the new law ultimately reduces health care costs is uncertain. By 2014, states are required to create Small Business Health Options Programs, or “SHOP exchanges.” These exchanges are intended to provide affordable health care options for small businesses. Whether this can be done, and which small businesses will qualify to use them, is unknown at this time.

How small business owners will solve their health care concerns now and in the future is anyone’s guess.

Resources:

• There is a concise write-up of key provisions affecting small businesses at NFIB.
• Find a timeline of provisions affecting small business from AOL Small Business.

The House version of health care reform, the Affordable Health Care for America Act (H.R. 3962,) that was passed on November 7, 2009, would probably hurt, not help, small businesses with the challenge of providing medical coverage for staff.

Here’s what the bill would do:

Force small businesses to offer health care for full-time and part-time workers. To offset some of the cost, there is a tax credit for small businesses with 25 or fewer employees, but it would be available only for two years and eligibility for the credit in those two years would be difficult to achieve.

Impose higher payroll taxes on businesses with payrolls of $500,000 or more that do not offer “qualified” health insurance; these businesses would have to pay an 8% payroll tax.

Raise income taxes on successful small business owners (a 5.4% surtax on singles with income over $500,000 and joint filers over $1 million). NFIB estimates that more than one-third of owners of small businesses employing 20 to 250 employees could face this surtax.

In effect, the Act would discourage small businesses from hiring new employees, could lead to more layoffs of existing employees, and might even force some owners out of business.

While the House version is a long way from becoming law (the Senate first has to consider its own version and then, if passed, would have to be reconciled with the House version), it is still scary that so many members of Congress don’t get small business—or maybe they just don’t care.