This may be outside the traditional scope of this corporate finance blog, but Obamacare is likely to have far-reaching consequences that affect the finances of many small and midsized corporations. Caveat: I am not an expert on the Affordable Care Act, but my hope is that the following is a relevant and timely perspective for business owners.
Implementation of Obamacare is just around the corner. October 1, 2013 looms as an important date for the birth of government backed “health insurance marketplaces,” also known as “Obamacare exchanges.” On these exchanges, individuals and companies will be able to find insurance policies that are in accordance with the new laws defined by the Affordable Care Act (ACA). On October 1, all employers regardless of size are required to inform employees of the impending changes due to Obamacare and provide resources materials for employees to learn more about the changes in the law.
Obamacare’s true impact won’t be known for a few years. Employers will be forced to endure the uncertainty created by the legislation for about five years, as it may take as long as 2018 for all changes to come into effect.
As the country’s largest collective employer, small businesses will witness significant changes to their hiring costs in the long term, despite lawmakers’ best efforts to play down the consequences of the new law on small business health and growth. Throughout 2013, businesses with fewer than 50 employees typically paid premiums 18% higher than their larger counterparts. The ACA seeks to mitigate the increased costs imposed on employers by giving small and medium-sized business tax credits. Companies with 25 employees or fewer that provide health insurance to all employees will receive a tax credit for 35% this year, and will see that tax credit increase to 50% next year.
Notwithstanding rising premiums, the Affordable Care Act includes a “Cadillac Tax”, which amounts to an excise tax on high-cost coverage. Beginning in 2018, a 40 percent excise tax will be levied on employers that choose to provide health insurance benefits that exceed a predefined threshold (of $10,200 for individuals and $27,500 for families), despite the fact that small businesses typically have to pay higher premiums than larger businesses. Medium-sized businesses (greater than 50 full-time employees) will be punished by the employer mandate starting in 2015 should they fail to provide employees with “minimum essential” health care coverage as they are fined $2,000 for each employee that does not have coverage (employers won’t be fined for their first 30 non-insured employees though).
While a proposed benefit of the ACA is to make premiums cheaper for small business (in the form of expanding the total number of individuals with healthcare and including higher proportions of low-risk people in the insurance pool), the move toward entitlement healthcare will be expensive for employers in the long-term. Employers are currently able to offer healthcare as a competitive benefit to attract employees, or as an encouragement tool to get higher-quality work out of their current employees. As healthcare becomes an employer-funded entitlement, the value of offering healthcare is lost and employees will no longer associate value with the employer’s cost of providing health insurance.
The 50 employee Threshold: How Obamacare will affect hiring
The dividing line between businesses small enough to avoid the mandate and those large enough to be forced to participate is currently set at 50 full-time employees. Commentators predict that small and mid-sized business will move marginal employees from full-time to part-time in an effort to avoid the government mandated regulations and remain free to provide employee healthcare benefits as they see fit. While this is an unintended consequence of the law, the 50 employee dividing line is likely to make businesses unwilling to take the next step in expansion until it is absolutely necessary to hire more staff. These mid-sized companies that are on the cusp of 50 employees will be forced to assess employee efficiency, pursue alternative options and will likely reassess their hiring choices.
Overall, the ACA will probably not be as directly expensive or impactful on small and medium-sized business as initially publicized in the media, given that business owners are creative at finding solutions to managing costs. However, if the solution is to build a staff of part-time employees, then the new law may lead to a new economy with a different employment culture, where tenure and loyalty become a thing of the past.