Our current health care system creates particular challenges for small businesses. But the new Patient Protection and Affordable Care Act provides various forms of relief for small businesses that often struggle to pay for their employees’ health coverage. In fact, recent guidance released by the Department of Treasury—included in this updated calculator— broadens the supports that small businesses are eligible for under PPACA.
Small businesses spend about 18 percent more on average than large businesses for comparable health policies. This is largely due to high administrative costs, which can be up to 30 percent of premiums, their limited ability to spread risk because of these businesses’ small scale, and a lack of market power when negotiating rates with insurers.
One-third of workers at firms with fewer than 25 employees are uninsured. High uninsurance rates among small-business employees partly reflect the fact that their employers are less likely to offer coverage, especially at the smallest firms that pay the lowest wages. Firms with fewer than 10 employees that pay low wages (in the bottom quartile) had a coverage offer rate of 18.4 percent in 2008, compared to the national average of 56.4 percent. Overall employer-sponsored coverage offer rates have declined by nearly 5 percent over the past decade, but the decline for small businesses was significantly steeper at 21 percent for firms with 10 to 24 workers and 28 percent for firms with fewer than 10 workers.
The recently passed Patient Protection and Affordable Care Act makes substantive improvements to our health care system that will better provide small business employees access to affordable, quality health coverage. The new health reform law provides certain small businesses with a tax credit to help pay for coverage in the years leading up to the establishment of state health insurance exchanges in 2014, and for two years once the exchanges are established. The state health exchanges will have further reformed insurance market rules, which will provide small businesses with a new avenue for purchasing coverage. And if small businesses decide not to offer coverage, lower-income employees will likely receive subsidies to purchase coverage within the exchange.
This calculator will help small business employers determine the premium subsidies for which they are eligible in the years leading up to the establishment of the state health exchanges (2010-2013), and once the exchanges are established (2014).
Patient Protection and Affordable Care Act and small business
PPACA provides small businesses with a tax credit of up to 35 percent of the employer’s share of the cost of health expenses from 2010 to 2013, and up to 50 percent of expenses once state health insurance exchanges are operational in 2014. These credits are offered on a sliding scale for small businesses, those with up to 25 employees whose average earnings do not exceed $50,000 a year and pay at least half their employees’ health expenses. Based on recent guidance from the Department of Treasury, small businesses will be able to include their traditional health insurance costs and any add-on dental, vision, and other limited-scope coverage, as long as they pay at least half of the premium. The smaller the firm and the lower its average wages, the larger the share of premiums the tax credit will pay. The treasury also clarifies that small businesses will see no reductions in their federal credit even if they also receive state credits or subsidies for health insurance payments.
Sonia Sekhar is a Resesarch Assistant for Health Policy at the Center for American Progress