How Health-Care Reform Will Affect Small Business

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Tax Credits for The Smallest Companies

Businesses that pay more than 50% of employees' health benefits, have fewer than 26 employees, and pay average annual wages of less than $50,000 can claim a tax credit of up to 35% of the cost of premiums from the 2010 tax year through the 2013 tax year. The credit will go up to 50% in 2014 and can be used for two consecutive years after that.

One entrepreneur who says the credit may spur him to offer benefits is Paul Ward, CEO of Media Mechanic, a Web design and multimedia agency based in a suburb of Portland, Ore.

Ward is currently insured through his wife's employer and cannot afford to provide coverage for his two employees. The tax credits may change things. "I'm looking at the 35% tax credit this year and that's a fairly good chunk. That brings it down to where now it will make more sense to buy a premium for myself and my team," he says.

Some 4 million businesses are expected to be eligible for the credit this year, and the Congressional Budget Office estimates that the credit could save small businesses $40 billion by 2019.

Tammy Rostov already buys health coverage for herself and her five full-time employees at her Richmond, Va., retail store, Rostov's Coffee & Tea, but the cost has increased so much that she has considered dropping it in recent years. Getting tax credits will help, but she says she would probably continue to offer insurance even if reform had not passed.

"It's still something I would offer through the business because that's always been important to me. But this year I had to think about it hard because it got so expensive, I wasn't sure I could do it," she says.

letting employees shape their plans

Liz Parker, who founded the Tulsa Rib Company in Orange, Calif., in 1981 with her husband, has 17 full-time employees. She is looking forward to getting tax credits for the coverage she already offers, which has put her at a price disadvantage against competitors, few of which cover employees.

Parker hopes that small businesses will get prices comparable to larger businesses when they are able to buy pooled coverage through the small business exchanges. "I've been at a great disadvantage, but now there's an end in sight," she says.

By 2014, she will decide whether to continue offering group coverage or let her employees buy their own health insurance, perhaps with a pay raise to help. Individual employees could buy the coverage they need rather than having her choose a group policy that isn't necessarily a good fit for everyone. "It's a horrible feeling having to pick and choose the coverage options for everyone," Parker says.

Lani Hay is president of Lanmark Technology, an IT company based in Vienna, Va., that specializes in government contracting work. The former U.S. Naval aviator opened a one-woman shop in 2003 and now employs 150.

Hay already provides insurance but worries that her costs will increase dramatically from now to 2014, when she'll gain the option of buying into an exchange.

risk: tax increase on unearned income

"In the past three years, my health costs have increased each year by double digits. That cuts right into the profit margins of my company," Hay says. "For any small business, whether it has 10 or 500 employees, it's a challenge having enough working capital. But to be competitive and attract the same employees as the bigger guys, we have to offer the same benefits package they do."

Another worry plagues R. Michael Johnson, president and CEO of Cox Industries, a midsized lumber company in Orangeberg, S.C. He provides a generous benefit package for his 400 employees, but the company relies on family shareholders and outside investors, some of whom will be affected by the tax increase on unearned income for wealthy individuals.

"The 3.8% tax on unearned income will increase the earnings requirements on [subchapter S corporations] such as Cox to satisfy the risk our shareholders take by investing in small businesses like ours," Johnson wrote in an e-mail. "This small percentage seems benign, due to the small number and putting it on 'unearned income,' but this income is earned. In fact, our team works hard every week to earn this income and reward the shareholders that patiently leave their capital in the business."

Another thing that worries Johnson is his calculation that he might save up to $2 million if he were to drop his employee benefits and instead pay the $2,000 per-head penalty. "We are not even remotely considering this option, but I hate to think that new legislation would actually make dropping our plan more appealing to businesses like ours," Johnson says.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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