Obamacare’s many definitions of small business breed confusion, challenges

JESSICA RINALDI/Reuters - The health care law includes at least six different size limits for small business exclusions and requirements.

It is a question employers across the country are trying to answer as the government prepares to implement some of the most important provisions of the health care reform law: “Does my company qualify as a small business under Obamacare?”

The answer is anything but simple.

The legislation features a number of requirements and exclusions that apply only to small businesses; however, the new rules rely on different measures to determine which firms are considered “small,” and several are scheduled to fluctuate in the years ahead.

Some say the inconsistency adds an unnecessary layer of complexity to the law, confusing many employers and making it difficult to gauge the legislation’s impact on Main Street.

“It leads to a lot of head scratching and heartburn for business owners,” Kevin Kuhlman, manager of legislative affairs at the National Federation of Independent Business, said in an interview. The varying definitions make “it difficult for employers to know which of changes and requirements apply to them.”

Next month, for instance, small-business owners will gain access to new online health insurance marketplaces, known as exchanges, where they will be able to select from an array of plans from various insurers. In order to target small businesses, lawmakers reserved access to the exchanges to firms with fewer than 100 employees (though states are allowed to set the limit lower for the first two years).

That threshold is significantly lower than the ones set by the Small Business Administration, which often uses a 500-employee ceiling to define “small business” but offers government-backed loans to firms with as many as 1,500 workers, depending on their industry.

Consequently, many companies that qualify as a small business by SBA standards will not be allowed to use the small-business insurance marketplaces.

An even larger number of firms that are considered small by most federal standards will not qualify for one of the most important small-business provisions in the law — an exemption from what is known as the “employer mandate.”

Starting in 2015, large employers must start providing sufficient health insurance to their workers or pay steep tax penalties, while small firms are waived from the mandate. Rather than setting the exemption cap at the SBA’s 500-employee mark or the insurance exchange’s 100-employee mark, though, lawmakers placed the cap at 50 workers.

“A lot of business owners have that 50 number stuck in their heads, because the mandate has been front and center,” Kuhlman said. “Some don’t realize that there are other eligibility requirements above and below that.”

Kuhlman pointed out, for example, that the law also includes a number of tax breaks designed to help small-business owners pay for health coverage, which have covered up to 35 percent of employers’ health costs since 2010 and will increase to 50 percent in 2014.

The size limit for the full tax credit? 10 employees. A partial tax credit? 25 employees.

“We’re in that weird doughnut hole between one limit and another,” Fred Callahan, owner of Colony Papers in York, Pa. His company has around 40 employees — small enough to be exempt from the mandate but too large for a tax break.

That could change, though. In his latest budget framework, President Obama proposed extending the health law’s tax breaks to firms with up to 50 employees, which Sabrina Siddiqui, a spokesperson for the Treasury Department, said “could mean a tax cut of tens of thousands of dollars for small businesses” on top of the existing credits.

However, the proposal has failed to gain any traction in Congress. Some of Callahan’s competitors, which are only slightly smaller than his firm, are therefore eligible for credits that his company cannot access.

Hugh Joyce, owner of James River Air Conditioning in Richmond, says he, too, will lose out to some of his smaller competitors, even though his firm falls well under the cap for most federal small-business programs.

“Our company does not qualify for the exchanges, and that’s unbelievable,” said Joyce, whose company employs about 150 people, said. “If you’re going to create an exchange that is supposed to offer affordable care to small businesses, why shouldn’t a company like ours be able to access that?”

Meanwhile, another provision in the law requires large firms to automatically enroll their workers in health care plans, meaning new hires who are not interested in the plans, or who are covered by another family member’s plan, would have to actively opt out of the coverage. The small-business exemption from that requirement is set at 200 full-time employees. In addition, large firms are required to start reporting the total value of every employee’s health plan on their tax forms. That rule applies only to employers that file 250 or more W-2 forms.

Some of the legislation’s limits are set not at employee totals, but at revenue levels.

A new tax on investment income in the law, for example, applies only to individuals earning annually more than $200,000. Critics have cast that as a tax on successful small firms, most of which are structured as pass-through entities, meaning their owners pay their company’s taxes as part of their personal income taxes.

In addition, by the end of September, companies with more than $500,000 in annual revenue are required to notify all employees of the coverage options available to them through the new health exchanges.

“You often hear the administration suggest the law really doesn’t apply to your company if you have fewer than 50 employees, but we disagree,” Kuhlman said. “A lot of them will fall over that $500,000 mark, for example, but many don’t realize they are required by law to send out that notification to their employees.”

He added that the inconsistency makes it challenging to assess the law’s impact on small firms, because “people are talking about small businesses at different levels, so the debate is often comparing apples and oranges.”

Keeping track of the which provisions apply to which firms is awfully challenging, too, Joyce said.

“They were trying to be soft on small businesses and hard on large businesses, but this complicated scheme is just going to make it hard on everybody,” he said. “It just turned into such a massive, convoluted piece of legislation.”

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