Ivana Cut owns Curl Up & Dye, a successful chain of hair salons.  Curl Up & Dye currently employs 47 full time stylists and, with the promising positive turn around in the economy, is planning to hire 5 new employees within the next year.   The company does not currently provide health insurance benefits to its employees.   Like many small business owners, Cut is closely watching President Obama’s health care legislation to assess how it will affect her business and whether she will be penalized for not providing health insurance to her employees.

The 2400 page Patient Protection and Affordable Care Act requires nearly every American to obtain health insurance.  Not surprisingly, the law envisions that most workers will obtain coverage through their workplace. The Act provides a system of “carrots” and “sticks” to motivate employers to provide health insurance coverage to all their employees.  Most likely, the biggest change to Cut’s business will be that once she hires 50 employees, Curl Up & Dye will be considered a large employer under the Act.  Beginning in 2014, large employers, those who have at least 50 full time employees, must make available an Act mandated minimum level of health care coverage or pay an annual penalty of $2000 per employee.  Also beginning in 2014, businesses of less than 100 employees will be able to buy health insurance through state-based exchanges known as “SHOPS,” allow small businesses to pool together to purchase insurance at prices historically enjoyed only by larger businesses.  Accordingly, while Curl Up & Dye would currently be exempt under the new Act from having to provide health insurance coverage, any anticipated growth will push it over the “play or pay” threshold.

Tilting the Scales in Your Favor

Small businesses will need to closely monitor the number of their full time employees to determine their options and potential penalties.  Critical to the counting of full time employees is the impact of part time employees who may be counted as partial employees to determine whether a business has 50 employees.  Human resource managers would be wise to calendar employee counts on a monthly or quarterly basis.  Also, small businesses may want to take advantage of certain tax incentives in the short term.  In tax years 2010-2013, small businesses with less than 25 employees and annual wages of $40,000 or less are eligible for a 35% tax credit if they pay 50% or more of their employees’ health insurance costs.  Starting in 2014, small businesses that purchase health insurance through a SHOP can receive a two year tax credit of 50% of the cost of the premiums.