A ‘HIT’ To Small Business

“We have been a very blessed company,” said Joe Donaldson, co-owner and General Manager of Sam’s Furniture in Springdale. “We’ve actually had double-digit increases the last three years in a row.”

Donaldson’s parents started the furniture company back in 1992 with a handful of other employees. Currently, Sam’s Furniture has two locations in northwest Arkansas and employs close to 50 people. Less than two years ago, Donaldson was even ready to expand into central Arkansas with a third location, but his plans changed.

“We would’ve probably already been open in Little Rock with a third store if this whole health care thing wouldn’t have taken place,” said Donaldson. “But it scared the heck out of us.”

Donaldson is, of course, referencing the Affordable Care Act — more commonly known as “Obamacare.”  The ACA was signed into law back in 2010, and with it, so too were several new taxes, including the Health Insurance Tax (HIT), which is set to kick in this year. The HIT is one of the largest tax increases included in the ACA, raising $101.7 billion in the first 10 years and $208 billion in the second 10 years.

While the HIT is not technically a small-business tax, most analysts say it might as well be. The actual tax will be levied on health insurance companies who operate in the fully insured marketplace.  Eighty-eight percent (88%) of small businesses purchase their insurance through this particular marketplace, and insurance companies are expected to pass the added expense on to smaller employers like Donaldson.

“It’s taken the entrepreneurship out of the people that have the ability to grow,” said Donaldson, who sits on the board of the Springdale Chamber of Commerce. “And that’s sad.”

“If you remember last fall, whole books of individual policies were being cancelled because they did not meet the minimum essential benefit requirement under the health care reform,” explains Tom Kane, senior vice president with Stephens Insurance. “Well, the small group market is the same kind of thing. If you’re in a non-grandfathered plan in a small group, you have to have a plan that meets the minimum essential benefit requirements, and so some small employers are being forced into plans that have much richer benefits than what they had previously, and that’s also driving up their costs.”

Another headache is the “employer mandate,” which requires small businesses with 50 or more full-time equivalent employees to provide “qualified and affordable” health insurance or pay a penalty.

“Small employers need to be very careful about thinking that I can get up to 48-49 full-time [employees] and then manage hours of a part-time population to avoid that 50 threshold,” warns Kane. “If you’re using a large part-time population and you’ve got 40 full-time employees, you might hit that 50 threshold because it’s 50 full-time equivalent hours.”

The hardship could be even greater for employers with 50-100 employees.

“They have to offer ‘qualified and affordable’ coverage or pay the penalty if they have more than 50 full time employee equivalents,” adds Kane. “They also are subject to the ‘essential benefit’ requirement forcing their insurance to cover more services unless they have a grandfathered plan or more than 100 employees.”

The mandate, originally scheduled to kick in this year, has been pushed back twice now by the Obama administration. Last summer, employers were told the mandate would be delayed until 2015. Earlier this month, the White House announced yet another delay. Employers now have until 2016 to comply before the government starts doling out penalties. But with all of this uncertainty, small businesses are already planning ahead.

“We were at about 56 employees when this whole health care thing started,” explains Donaldson, who estimates the HIT will cost his company tens of thousands of dollars in 2014. “Not only have we grown our volume, but we’ve had to do it with six or seven less people because we had to get under that 50.”

The penalty for not providing coverage is currently $2,000 per full-time employee, exempting the first thirty. If employers decide it’s easier to simply pay the penalty and tax consequence, their employees may end up paying the price, warns Kane.

“It’s really going to be painful for your higher paid employees to replace that coverage,” said Kane. “If you have a very low paid workforce, the employees may not be as impacted because they can go to the exchange and get premium subsidies based on household incomes. If you’ve got a higher paid income workforce, they may or may not be eligible for any premium subsidies and they are having to access the exchange with post-tax dollars.”

Small business owners won’t be the only ones affected by HIT. According to a study by Doug Holtz-Eakin, former director of the Congressional Budget Office, the HIT will cost each family, on average, about $5,000 in higher premiums over the next decade. That’s about $500 a year. And it won’t stop at premiums either, as Donaldson points out.

“I hate to say that businesses will just raise prices, but – in reality – that’s what is going to happen,” said Donaldson. “We’re either going to have to raise prices to offset the loss of that margin of profit to basically get over that added expense, or they will cut benefits and cut employees.”

So, for now, an expansion into Little Rock – which would add between 30-40 new Arkansas jobs – will have to wait.

“It’s the thumbtack that’s just poking you and pushing you backwards,” adds Donaldson.

Currently, both the U.S. House and Senate have bills that, if passed, would repeal the HIT, but the odds of getting those through an already gridlocked Congress — in an election year — is easier said than done.