Small businesses have enough to worry about without having to wade through the intricacies of hundreds of pages of the health care legislation enacted in 2010: the Patient Protection and Affordable Care Act, PL. 111-148, as amended by the Health Care and Education Reconciliation Act, PL. 111-152, referred to here as the health care law. And even if they have spent time learning about the law, questions remain for small business owners and for advising CPAs: What exactly are exchanges? How is the number of full-time-equivalent (FTE) employees calculated, and why does it matter? Who qualifies for the small employer health insurance credit? What is the shared responsibility penalty, and does it apply?
These are among many questions that have small businesses flummoxed. Three provisions in particular--health care exchanges, the small employer's health insurance tax credit, and the shared responsibility penalty--affect small businesses, whose CEOs often act as accountant, IT director, sales manager, and any number of other roles.
The Sec. 45R small employer's health insurance tax credit is designed to help very small businesses whose employees do not earn a lot pay for their employees' health insurance. The credit is unavailable to employers with more than 25 FTE employees and whose average annual wages exceed $50,000, and it begins to phase out at 10 employees and wages of $25,000.
Larger businesses that don't provide health insurance for their employees or that provide insurance that is unaffordable, as defined in the law, may be subject to the "shared responsibility penalty" in Sec. 4980H. Although this is called a penalty for large employers, it applies to employers with as few as 50 full-time employees, hardly large by most definitions. For determining whether the penalty applies, any employee who works an average of 30 hours per week is considered an FTE. The number of FTE employees is counted in order to prevent employers from hiring all part-time employees to avoid the penalty.
The health care law requires each state to set up a health insurance exchange, which is intended to be a competitive marketplace for health insurance for individuals and small businesses. If a state does not set up an exchange, the health care law permits the federal government to step in and do so in its stead. Several states whose current governments are opposed to the health care law, e.g., Texas and Florida, have said they will not set up exchanges.
For purposes of participating in the exchange, the definition of a small business is a business with 100 or fewer employees. The exchanges are intended eventually to lower costs for both individuals and small businesses because they will be more transparent and will allow people to compare coverage costs and plans over the internet.
The track of health care reform in this country is still unknown, but change is coming.
"One thing we have to understand," said Phil Kennedy, a small business owner from Oklahoma, "is that this is a train that's moving."
Here is how four businesses are trying to keep up with that locomotive. Each business has spoken out about the law on behalf of lobbying organizations or interest groups, and three of the owners--Kennedy, Rick Poore, and Larry Schuler--testified before the House Energy & Commerce Committee's health subcommittee in March 2011.
SMALL BUSINESS, TINY TAX SAVINGS
The scenario. The Tulsa Rib Company opened more than 30 years ago, when Steve Parker decided to start his own venture after working in a variety of jobs in the food-service industry. He'd been a dishwasher at International House of Pancakes as a teenager, and he'd also worked at high-end restaurants. Most places he worked did not offer health care, and he'd seen a few co-workers get into major financial difficulty when beset with serious illness.
So he made providing health care coverage a priority when he began his business, serving ribs in Orange, Calif. …