What do the recently passed Health Insurance Reform and Jobs bills mean for my small business?

By Reed Richardson

Within the past month, Congress and the President passed two pieces of legislation-one minor, one major-that have elements specifically targeted at helping small businesses. But few entrepreneurs have the time to sort through legislative bills to find out just what the potential benefits are and when they might kick in. So, we've done it for you. Here, in nuts and bolts form, are ten frequently asked questions--with answers-regarding the new jobs and health insurance reform bills.


How does the new jobs bill encourage hiring and what time period does it cover?
The official name of the bill says it all. The HIRE-Hiring Incentives to Restore Employment-Act provides $17.6 billion in tax incentives to encourage businesses both large and small to hire an estimated 250,000 new employees by the end of this year. And because the bill was drafted in early 2010 but not officially passed until mid-March, its provisions were made retroactive a few weeks, so any new employees that meet the bill's qualifications criteria and were hired between February 3rd, 2010 and January 1, 2011 are eligible.

What are the hiring qualifications mandated by the jobs bill?
There are a few, but they aren't too onerous

  • First and foremost, the HIRE Act is primarily geared toward helping the unemployed, so for a new employee to qualify your business for incentives, he or she can't have worked more than 40 hours in the previous two months. (The new worker must sign an affidavit attesting to this. For an example of this IRS form, go here* http://www.mcguirewoods.com/news-resources/publications/taxation/Form%20W-11%20Draft.pdf
  • To prevent employers from gaming the system through zero-sum rounds of layoffs and hiring, the HIRE Act does not grant incentives to businesses that use new hires to simply replace another employee. However, a new hire would qualify if he or she replaces someone at your business that left his or her job voluntarily or was fired for cause.
  • Jobs bill credits are also available to employers who bring back former employees that your business previously laid off.
  • Adding your brother, mother, or daughter to your company payroll won't earn you anything other than smiles at the next holiday get-together, however, as family members of a business owner do not qualify.
  • Household domestic workers and independent contractors do not qualify either.

To see a handy sample worksheet of HIRE Act employee qualifications online, go to http://www.eidebailly.com/Services/Tax/documents/HIRE%20Act%20New%20Hire%20Certification.pdf

What exactly are these hiring tax incentives and how quickly do they work?
The incentives are two-fold. One incentive returns savings to your business almost immediately, while the other can't be realized until you file your 2010 taxes next spring.

  • The first of these financial incentives involves a tax holiday on the employer's share of a new employee's 2010 Social Security taxes. This equates to saving 6.2 percent of salary per new employee, up to the FICA tax wage cutoff of $106,800. Perhaps most importantly, businesses that qualify for this incentive would start to realize savings at the first payroll period after hiring and through the remainder of the new employee's tenure at the company or until the end of 2010, whichever comes first. All told, this incentive offers employers a maximum savings of $6,621 per new employee hired in 2010.
  • The second incentive, which is aimed at rewarding permanent rather than short-term hires, involves giving businesses tax credits for every new employee hired in 2010 that remains on the payroll for at least 52 consecutive weeks. The tax credit amount can vary somewhat based on the new hire's salary, but for the overwhelming majority--those employees that earn more than $16,129 in gross annual salary--the credit to the business will be capped at $1,000 per new employee.

So, for example, if your small business hired a new employee on April 1, 2010 at an annual salary of $40,000 and they remained there through next April, your company would save $1,860 on Social Security taxes during this year and could then claim an additional $1,000 tax credit next spring. (To check out the online HIRE Act tax savings calculator here: http://www.paychex.com/hireact/

I've heard a lot of different dates regarding the new health insurance reform law, when does it take effect?
It depends. Some of the more complicated elements, like the new private health exchanges and the additional surtaxes on high-end health-care plans won't kick in for several years, while many other parts, like the bans on coverage rescissions, coverage denial for pre-existing conditions, and annual and lifetime dollar-value limits, begin in September of 2010. A few elements, including a new high-risk insurance pool and substantial tax credits for small businesses that choose to provide health care to their employees, became effective immediately upon the bill's signing in late March. (For a more comprehensive rundown of which health insurance benefits begin when, check out http://www.cbsnews.com/8301-503544_162-20000848-503544.html?tag=contentMain;contentBody

How do the small business tax credits that start this year?
Starting in 2010 and running through 2013, very small businesses-those that have 10 or fewer employees with an average salary of $25,000 or less-can qualify for a tax credit equal to 35% of their employee health care contributions to help the business either continue or start up health care coverage for their workers. (The business must pay at least 50% of the cost of the health care premiums). Small businesses in the next tier up-those companies employing between 11 and 25 workers-will be eligible for partial credits on a sliding scale during the same period, up to a maximum average employee salary of $50,000. http://www.whitehouse.gov/health-care-meeting/questions/small-business-6

Does this mean my small business will have to start providing health care to my employees by the end of this year whether I can afford it or not?
No. While the incentives put in place by the health insurance reform bill are meant to encourage all businesses, both small and large, to transition to providing health care to their workers over the next four years, providing health insurance will not become mandatory until 2014. Then, even after the state insurance exchanges start up four years from now, small businesses with fewer than 50 employees will be exempt from the mandatory health insurance rules. However, it's worth pointing out that the reconciliation portion of the health insurance reform bill, passed a week after the main bill, stipulates that part-time workers will also be counted toward the 50-employee threshold on a pro-rated basis by hours worked. So, a small company with just 30 full-timers but dozens of part-time hourly workers still might be required to offer health insurance or be subject to the annual per-employee penalties.

I've heard a lot about these penalties and am fearful about their potential impact to my small business's bottom line.
Again, these penalties wouldn't kick in for four years, and if your small business doesn't meet the minimum-size requirements of 50 full-time equivalent employees, it will still be immune from having to paying the $2,000 per-employee annual penalty after 2013. If your company does surpass the size threshold by 2014, the new law temporarily deducts your first 30 workers when assessing this penalty to mitigate somewhat the potential financial burden. This means a small company with 51 FTE workers that chooses not to offer health insurance starting in 2014 would pay an annual penalty of $42,000 (21 assessed employees x $2,000 fine each). In addition, some high-cost/high-benefit "Cadillac" health plans-those that cost more than $10,200 a year for individuals or $27,500 for families-will be subject to a 40% tax on the portion above the limit, but that provision won't kick in until 2018. While the insurance companies, rather than individuals or businesses, will pay this surtax, higher premiums on these Cadillac plans could very well end up affecting the latter.

So, in four years, is my growing small business going to face an unpleasant choice between unaffordable health insurance and steep annual penalties?
It's too early to tell. The stated goal of the new health reform law is to build more affordable health insurance options so that by 2014, when the individual mandates and penalties are put in place, small businesses will be less dramatically affected because they will be able to find health insurance through a new private exchange that is both affordable and works for their employees. To further ease the transition, once the new private state health exchanges start up four years from now, the small business tax credit for health insurance rises from the current level of 35% up to 50% of employee contributions for the first two years. In addition, each state must also set up a health insurance exchange specifically aimed at smaller companies--known as Small Business Health Options Programs or SHOPs--where those businesses with fewer than 100 employees can pool their resources together to strengthen their buying power when shopping for coverage.

I'm self-employed, how will the health insurance reform affect my health coverage?
If you're currently uninsured, you should know that starting this year the new reform law establishes a temporary, high-risk insurance pool for the self-employed as well as small business employees without employer insurance. This new exchange will allow those who have pre-existing conditions or who have had a lapse in coverage for more than six months to gain access to full insurance coverage. In addition, the reform law will provide small businesses and the self-employed access to a new, simplified cafeteria-style health coverage plan with tax-free benefits.

What about the impact on the personal finances of small business owners and the self-employed?
As for the potential effect on the personal finances of the self-employed, its impact could vary widely. Starting in 2014, the new law's individual mandate will asses a penalty on individuals who can't provide proof of health insurance on their annual income taxes. However, low and middle-income self-employed individuals will be eligible for significant tax credits, scaled along with income, to help cover these costs. So, for example, an entrepreneur just starting out who claims zero income in 2014 would be required to pay as little as 2% of his or her annual individual health insurance premiums, whereas an established self-employed business owner making $43,000 (or a family of four with a household income of $88,200) would be required to cover as much as 9.5% of his or her annual premiums. (A simple health insurance subsidy calculator can be found online here: http://healthreform.kff.org/SubsidyCalculator.aspx

For those individuals who still choose not to purchase health insurance starting in 2014, the annual penalty would start at 1.0% of taxable income that year, rise to 2.0% in 2015 and then hit 2.5% of taxable income by 2016. In addition, all individuals earning more than $200,000 in a year or those making more than $250,000 annually in total household income, would be subject to slightly higher Medicare taxes to help defray the cost of the program's new incentives and subsidies. In addition, individuals and families in this same income category would be subject to a 3.8% surcharge on income-generating investments like bank interest, dividends, capital gains, and rent.