Benefits in federal health reform may not entice small businesses

April 25, 2013

Small business owner Virginia Donohue provides her employees at Pet Camp in San Francisco with health insurance benefits - but the ACA tax credit only covers a fraction of the cost.

By Callie Shanafelt
California Health Report

The federal Affordable Care Act kept the nation’s employer-based health insurance system intact – and that decision may leave small business struggling to provide health care to their employees.

The Affordable Care Act tries to fill cracks in the employer-based system, so that more people will have insurance and care will become more affordable for everyone.

But critics say provisions in the Affordable Care Act aren’t enough to ensure that small businesses can provide coverage to their employees. Some provisions may actually discourage employers from providing insurance.

One provision already in place is the small business health-care tax credit, which targets businesses with small staffs and low salaries. Businesses that have fewer than 10 employees who are not paid more than $25,000 get a tax credit.

Currently, the credit is up to 35 percent of their costs, if they pay for at least half of their employees’ premiums. Next year, the credit jumps to 50 percent.

“That’s going to give some businesses enough confidence to take the plunge and offer health care,” said David Chase, California Director of the Small Business Majority advocacy organization.

Virginia Donohue, owner of Pet Camp in San Francisco, received the credit for the past three years. She employs twenty people who provide day and night care to 260 dogs and cats.

“Pet Camp’s philosophy is that everybody needs health care.” Donohue said. “Unfortunately, you get it through employment.”

Donohue began offering her employees a choice of health plans in 2000. She paid $30,000 for complete coverage for ten employees. Her costs skyrocketed over the next decade. Two years ago, she had to stop offering a choice of health plans to her twenty employees because it would cost her $121,000 a year, even with her employees covering more of the costs. She switched to only offering Kaiser, but she still pays $90,000 a year to cover 80 percent of the premiums.

These rising costs have driven many businesses to stop offering health insurance. As Donohue watched her costs rise over the past 10 years, other businesses stopped covering employees altogether. Businesses in California covering their employees’ health care dropped from 62 percent to 53 percent, according to a Robert Wood Johnson Foundation study released this week.

The tax credit was meant to make it worth it for businesses to cover their employees. The credit was helpful, Donohue said, but it was only $7,000 for her.

“Seven thousand a year is very nice,” Donohue said. “But when you’re paying $90,000 a year, it doesn’t change the picture.”

Donohue hired an accountant to do her business taxes, but the paperwork for the Obamacare tax credit is so complicated that she does it herself.

“I’m getting better at it,” Donohue said. The first year it took her six hours. This year she’s got it down to four. “At the rate an accountant charges, that can eat up a substantial amount of the credit,” Donohue said.

Richard Chassey, a small business accountant in Santa Rosa, gets the tax credit for all his clients who qualify.

“Although each situation is different, in my opinion the time to organize and prepare the paperwork is worth the tax credit,” Chassey wrote in an email response during the busy tax season.

Elizabeth Echols, Regional Director of the Small Business Administration, estimates that four million small business owners are eligible for the tax credit, totaling $40 billion dollars nationally. But the program has been underused, with only five percent of those eligible taking the credit in the first year.

This is unlike other provisions of the Affordable Care Act, which have exceeded expectations. The Pre-Existing Insurance Plan was so popular the government had to freeze enrollment. More than three million young people have also added themselves to their parent’s health-care plan—many more than anticipated. More people are signing up for the Low Income Health Plan—the precursor to the Medi-Cal expansion—each day.

David Chase said business owners don’t know which benefits are available to them.

“If you don’t know about it, you can’t claim it,” Chase said.

Small Business Majority and the Small Business Administration are ramping up efforts to educate owners. In workshops of 50 business owners, Chase regularly asks who knows about the small business health-care tax credit.

“Maybe one person raises their hand,” Chase said.

The most common misconception among small business owners is that they will be mandated to provide health-care to employees, Chase said. In fact, businesses with fewer than 50 employees are not subject to the employer mandate.

Ninety-six percent of businesses in the U.S. have fewer than 50 employees. The vast majority of businesses with more than 50 employees already offer coverage, Chase said. “We are really looking at a very small sliver.”

But the majority of people work for companies with more than 50 employees, said UC Berkeley Assistant Law Professor David Gamage. Gamage, a tax attorney, spent two years in the Treasury Department figuring out how to implement the tax provisions of the Affordable Care Act.

Some of the tax provisions will have unintended negative consequences and possibly discourage employers from providing health-care to employees, Gamage said. This is because there are two competing health-care subsidies.

Businesses already get tax benefits for providing health insurance to employees, he explained. The government essentially subsidizes employer coverage now because the share of the premiums that employers pay for employees’ health plans is not considered taxable income.

For example, if an employee receives a $40,000 a year salary, the worker must pay tax on that amount. But if the employer pays an additional $5,000 a year for health coverage for that employee, the expense isn’t taxed.

This benefits higher wage earners more than low and middle-income employees.

“That’s essentially a historical accident that we’ve never been able to fix,” Gamage said.

The Affordable Care Act creates a generous tax subsidy for low and middle-income individuals who can’t get insurance through an employer. People get this subsidy by purchasing a health-care plan through an online marketplace; in California it is called Covered California. Anyone who makes less than 400 percent of the federal poverty level—$45,960 for an individual—will qualify for a subsidy toward their monthly premium.

These two separate subsidy systems may create a situation in which it is more beneficial for an employee to purchase coverage through the exchange – thus discouraging employers from providing health insurance.

“I predict that we’ll get a lot of gaming reactions,” Gamage said.

Instead, Gamage recommends combining and regulating health-care subsidies through one system.

Providing health-care to employees has been the top concern of small businesses every year since 1986 in a National Federation of Independent Businesses study.

“Both because it’s the right thing to do and it makes them more competitive,” Echols said.

Because of the complexity of the business provisions, David Chase recommends business owners speak with their accountant and insurance agent to figure out what is best for them. For the right business, he said, the tax credit could make it worth offering health care to employees.

“Don’t just look at the headlines,” Chase said. “Every business is very different.”

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