The Baucus Healthcare Plan: What Small-Business Owners Need to Know

Tax penalties. Although no employer will be automatically punished for not providing coverage, there are still some fines in the bill that apply to firms with 50 or more employees—only 4 percent of all businesses that hire. But for businesses included in that 4 percent, the tax penalties can be hefty. That's because the bill provides subsidies for individuals and families who make up to 300 percent of the federal poverty level to help them buy insurance through the state health exchanges. Employers that don't provide coverage will have to pay a tax penalty for each employee who receives these subsidies. This has been dubbed the "free rider" provision because it is intended to deter employers from "free riding" off the new health insurance exchanges.

The penalty is either the average cost of subsidies that year multiplied by the number of employees receiving subsidies or $400 per employee—whichever number is lower. But business owners won't be told what they owe. They'll have to crunch the numbers themselves to determine if they owe the full amount or the minimum, says Judith Solomon, senior fellow at the Center on Budget and Policy Priorities. There are many administrative burdens that could come with this provision. For example, a business owner would have to keep track of which employees qualify for subsidies, if they suddenly become qualified, or if they drop out of the exchange altogether. Some business that want to avoid the penalty can expect disputes with the tax man—it will be up to them to inform the IRS that some former employees who received health insurance subsidies were laid off or no longer work there, says Solomon.

Another complicating factor of the "free rider" provision for employers is that it might make them think twice about whom they hire. "It does distort the hiring decisions in the direction of employers who don't need coverage," says Solomon. A business owner might be inclined to look for potential employees who already get health insurance through their spouse, for example, in order to avoid dealing with the tax penalty. Choosing to hire or not hire someone on that basis could land a business owner in legal trouble.

Insurance taxes. One of the most controversial aspects of the Baucus bill is that, if passed, it would be partially funded by an excise tax on health insurance companies. In 2013, a 35 percent tax would kick in on insurance policies in which premiums are above $8,000 for single people and above $21,000 for families. It might not seem as if a tax on insurance companies would have much to do with small businesses, especially considering that few small businesses have the type of gold-plated, "Cadillac" health insurance plans to which the tax applies. But Keith Ashmus, the chair of the National Small Business Association, says these taxes could be passed down to all employer health insurance plans—not just the gold-plated ones—in the form of higher premiums. "The tax will be part of the entire cost structure of the insurer," he says. "[So] the trigger will be a high-cost plan by company Y, but the impact will be felt by everyone."

The good news is that as the Senate has negotiated aspects of the bill this week, Baucus appears to be willing to ease the impact of the excise tax—but not eliminate it.