The Affordable Care Act and Small Business: Economic Issues

Sean Lowry
Analyst in Public Finance

Jane G. Gravelle
Senior Specialist in Economic Policy

The Patient Protection and Affordable Care Act (ACA; P.L. 111-148 and P.L. 111-152) contains

several provisions to encourage employer-sponsored health coverage, particularly among small

businesses. The provisions that most directly relate to small businesses are (1) an employer

penalty for not providing health insurance, (2) a tax credit to increase the affordability of health

care for the smallest firms, and (3) small business health insurance exchanges designed to

increase plan options and lower plan costs.

Several events have altered ACA’s implementation since its enactment in 2010. Most notably, the

Obama administration delayed the implementation of the employer penalty and part of the small

business health exchanges from 2014 to 2015 to allow for more time for developing these

provisions and allowing firms to come into compliance. These delays have added to uncertainty

over the potential effects of ACA on small businesses.

First, this report explains how employer-sponsored insurance can be used to address concerns

about health insurance coverage and cost. Second, it summarizes the three ACA provisions most

relevant to small businesses, listed above. Next, it analyzes these provisions for their potential

effects on small businesses. Last, this report presents several approaches that could address some

concerns associated with these provisions (particularly the employer penalty).

According to analysis of the most recent employer size and insurance coverage data, ACA’s

employer penalty is structured so that it could exempt approximately 96.3% of employer firms

simply because they would be too small, and thus fall below the employer penalty threshold of 50

full-time equivalent (FTE) employees. These exempt firms account for approximately 28.1% of

all workers. After accounting for firms that already provide insurance, less than 1% of employer

firms could be subject to the employer penalty. Although 71.9% of all employees work for firms

that are large enough to be potentially subject to the penalty, only about 1.7% of employees work

in firms that do not already offer health insurance.

Less than 4% of small businesses that could have been eligible for the small business health care

tax credit in 2010 actually claimed it. According to a report by the Government Accountability

Office (GAO), many business owners felt that (1) the credit was too small of an incentive to

begin offering insurance; (2) even if these small employers offered health insurance, some

employees declined coverage because they felt that they cannot afford their share of the premium;

and (3) the rules were too complex. President Obama has proposed simplifying and expanding the

credit.

Small business health exchanges could help to reduce some barriers to accessing relatively

affordable health coverage in the small-group market. By pooling risk among multiple businesses

and reducing administrative costs, average insurance costs could reduce costs for these firms. On

the other hand, firms with relatively healthier employees could see a rise in insurance costs.

Date of Report: August 15, 2013
Number of Pages: 26
Order Number: R43181
Price: $29.95

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