Obamacare: Small Business Weighs Its Options

Originally published by: Wall Street JournalApril 8, 2013

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Small-business owners across the U.S. are bracing for the health-care law that kicks in next year, fearing it will increase the cost of providing insurance to employees.

But Rick Levi, a business owner in Des Moines, Iowa, is among those considering the government's escape hatch: paying a penalty to avoid the law's "employer mandate."

Under the Affordable Care Act, employers with 50 or more full-time workers will be required to provide coverage for employees who work an average of 30 or more hours a week in a given month. An alternative to that mandate is for business owners to pay a $2,000 penalty for each full-time worker over a 30-employee threshold.

Mr. Levi currently spends about $140,000 a year on insurance premiums to cover 25 managerial staff at his business, Consolidated Management, which runs cafeterias at schools, offices and jails.

Under the new law, he will have to offer insurance to all of his 102 full-time employees starting in January. Assuming all of them take the coverage, Mr. Levi says the cost of premiums could exceed $500,000.

"I've never made a profit in any year of the company that has surpassed that amount," says Mr. Levi, 62 years old. "I don't make enough money."

He says it makes more sense to drop insurance entirely and pay a penalty of about $144,000.

Gary Epstein, owner of Firstaff Nursing Services Inc. in Bala Cynwyd, Pa., has similar plans. He intends to stop offering health insurance benefits at his home health-care company.

Mr. Epstein, 52, employs about 250 workers and currently provides health insurance to his 20 office personnel. If he were to start covering the 100 or so nurses and nursing assistants that work full time, his annual health-insurance costs would jump to roughly $600,000 from the current $100,000, he says.

Even if he takes the penalty option, he estimates he would have to pay about $240,000—a cost he doesn't think his business could absorb. To compensate, he plans to cut the number of hours his nurses and nursing assistants work so they will be considered part-time under the law. He says he will hire more part-timers to ensure patients receive the same level of care.

"We're going to do everything we can in order to stay in business," he says.

The Department of Health and Human Services and the Treasury Department point to studies that suggest most employers aren't expected to drop coverage. The Center for American Progress, a liberal think tank, found that the number of people in Massachusetts with employer-sponsored health insurance didn't dip in the years following the passage of that state's 2006 health-reform law, which was a model for the Affordable Care Act.

"This law will decrease costs, strengthen small business and make it easier for employers to provide coverage to their workers, as we saw in Massachusetts, where employer coverage increased when similar reforms were adopted," says Erin Shields Britt, a spokeswoman for the Department of Health and Human Services.

Among 400 employers with 50 workers or more, 71% said they plan to continue offering health insurance while just 3% said they plan to pay the penalty, according to a February survey by the National Small Business Association, a nonpartisan entrepreneur-advocacy group in Washington, D.C.

One potential drawback to the penalty strategy: taxes. Health insurance is deductible as a business expense, but penalties aren't.

Nearly half, or 46% of 889 small-business owners surveyed by The Wall Street Journal and Vistage International say they don't know if providing health insurance will be more or less costly than facing penalties. More than three quarters, or 77%, polled online from March 11 to March 20, expect their health-care plans to cost more next year under the health-care law.

To avoid the employer mandate, some small firms are considering other strategies, such as increasing employees' share of the premiums, so they don't have to shoulder the entire cost of offering benefits. Others say they will stay under the 50 full-time employee threshold or deliberately turn full-time workers into part-timers. Average annual premiums for employer-sponsored health insurance in 2012 were $5,615 for single coverage and $15,745 for family coverage, according to the Kaiser Family Foundation.

Lois Rosenberry, owner Children's Discovery Center Inc. in Maumee, Ohio, says she will opt for the penalty if it is cheaper than offering health insurance. Just 65 of the 150 full-time employees at her business are on its health plan today. But like Mr. Levi and Mr. Epstein, she says she can't predict how many of her remaining employees will go onto the company's plan next year, when all individuals will be required to have health insurance. Some of those who don't take the benefit today may take it next year, while others may opt to go on a spouse's plan or get coverage through the individual insurance markets, says the 64-year-old.

"It's very frustrating for us as a small business in terms of planning," she says.

Mr. Levi, the food service entrepreneur, is worried that failing to offer insurance could entice employees to seek employment at competing businesses that do offer benefits.

"If we don't offer coverage, will it be harder to hire people?" he asks. "That's the unknown."

Weighing Options

Small-business owners are grappling with whether they will offer health insurance to employees next year under the health-care law, or pay a penalty. Here are their considerations:

Offering Health Insurance:

Average premiums were $5,615 for single-person coverage, $15,745 for family coverage, in 2012.

Firms with health benefits can be more competitive in the labor market.

Premiums may be tax deductible.

Taking the Penalty:

Costs $2,000 per full-time employee, minus the first 30.

Removes the administrative burden of shopping for insurance.

Puts the onus on employees obtain coverage elsewhere.

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