Jane G. Gravelle
Senior Specialist in Economic Policy
An issue in the development of the new health care reform legislation is the effect on small business. One concern is the effect of a “pay or play” provision to require firms to provide health insurance for their employees or pay a penalty. Current proposals have exemptions for small businesses, and also propose to provide subsidies for purchasing insurance. Economic theory suggests that health insurance costs (and any penalties) should be passed on to labor income, but that may be more difficult for employers of lower-wage workers.
Small businesses may benefit from the ability to purchase insurance in the exchanges set up by the states or the federal government.
On June 4, 2013, the Department of Health and Human Services announced a delay in the requirement of the plans for small businesses until 2015. On July 2, 2013, the administration announced a delay in the effective date of the employer penalty from 2014 to 2015, to allow additional time to deal with administrative issues.
Both the House bill (H.R. 3962, passed on November 14, 2009) and the Senate bill (H.R. 3590, passed on December 24, 2009) exempted small businesses from penalties. The House bill would have applied no penalties to firms with $500,000 or less in payroll; the Senate bill exempted firms with fewer than 50 employees; the final bill followed the Senate approach. The final legislation, P.L. 111-148 and P.L. 111-152, would exempt around 95% of firms with employees, and the share of firms with employees that would not be affected either because they are exempt or because they already offer insurance would be larger, probably around 98%. About 20% of employees work for firms that were estimated to be affected. The approximately 3% of firms with employees that are subject to the penalty would have to ensure conformance with insurance requirements.
The penalty for being a large firm and not providing insurance (triggered if one or more employees are eligible for the premium credit for lower-income families) is $2,000 per full-time employee (imposed ratably per month), but the first 30 employees are exempt. Firms that offer insurance also will pay penalties if their employees enroll in individual plans and receive the premium credit, but only for those employees. The proposals also provide temporary credits to subsidize small employers’ contributions to insurance for lower-income employees that depend on firm size and employee compensation. The credits would be as much as 50% of the employer’s cost. The subsidy for taxable firms is provided as a nonrefundable income tax credit and would not benefit firms with no income tax liability; there is a separate 35% credit for nonprofits.
The original Senate proposal had increased Medicare taxes on earned income on married couples with incomes over $250,000 and singles with incomes over $200,000 by 0.9 percentage points. The final legislation imposed the Medicare tax on high-income individuals’ passive investment income at 3.8%. Some concerns had been raised earlier about the effect on small business of a high-income surcharge in the House bill, which would have imposed (for couples) a 5.4% surcharge on incomes over $1 million ($500,000 for singles). The surcharge would have affected 0.3% of taxpayers and 1.2% of unincorporated businesses. The Medicare tax on investment affects a larger total share of the population (2.6%) but is imposed at a smaller rate. The 3.8% increase is not likely to fall on small business owners whose capital is invested in their business because this income is either already subject to Medicare or is exempt.
Date of Report: July 5, 2013
Number of Pages: 20
Order Number: R40775
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