Uncertainty Strangles Small Businesses

Businesses require two critical ingredients in order to expand and succeed: a clear understanding of what their costs are going to be, and access to capital. The current political and regulatory environment leaves them void of both.

When companies, (it doesn't matter if it's a mom-and-pop operation or multi-national corporation), face uncertainty, they all do the same thing: nothing. Or, at least as little as possible when it comes to spending money. It’s the reason trillions of dollars are currently sitting in corporate bank accounts; and unless it’s a bank, that’s not what a company should do with its excess cash. Companies are supposed to invest it in the business in order to develop new or better products/services, increase its earnings and hire more employees.

However, thanks to new federal regulations, both enacted and pending, many businesses have put the brakes on spending- especially when it comes to hiring. Businesses are very weary of the new health-care law; six months have passed since it became law and there is still no clarity on the specific health insurance coverage companies will have to provide and what it will cost.

Michelle Dimarob, senior manager of legislative affairs at the National Federation of Independent Business (NFIB) called the uncertainty onerous.

“There’s a lot of criteria that have to me be met, such as a base benefit package with 10 things you have to include.” But so far, many of the details are undefined.”

What we do know is that if an employer decides to offer health insurance for the first time or changes providers, the plan must cover 45 medical “preventive” tests/procedures for adults and children free of charge. As in, an employee will not even be required to kick in a co-pay.

This leaves companies that currently provide health insurance in a tight spot. If a businesses' insurance provider comes back with a big price increase for next year, the business owner has to make a decision. As Dimarob puts it, it may come down to: “If I switch to a new health insurer, I will expose myself to all the new requirements, including preventive-care services. My new premium is higher and it stinks, but I’m going to pay it.”

The new health law also calls for the creation of state insurance exchanges, which would allow health insurance providers to compete for business. According to Dimarob, initially, “we thought this might make health insurance cheaper, but based on anecdotal evidence, it’s going up.”

Jim Wordsworth, a small business owner outside Washington, D.C., already provides health insurance-- including dental and eye care--to his employees. But he doesn’t know if the plan he currently has will meet the new government standards because “they haven’t even been written yet.”  And, he expects it will cost more: between $650-$750 per person.

Under the health care act, small businesses with fewer than 25 employees(1) are excused from providing mandatory health insurance to employees.  However, to give them an incentive to do so, the law contains tax credits to offset the cost.  The White House claims 4 million small businesses will be helped,  but a spokesperson at NFIB calls the claim “a stretch.”

“The only businesses eligible for the maximum credit are those with 10 or fewer employees earning an average wage of $25,000 or less,” says Stephanie Cathcart.  “And, you must pay at least 50% of the premium.”  In addition, every time the business owner increases payroll  or wages, the amount of credit  received goes down. According to NFIB’s math, once you reach 18 employees and an average annual wage of $37,000, the credit completely disappears. Small business owners can see what, if any, credit they might qualify for by visiting NFIB’s calculator http://www.nfib.com/issues-elections/healthcare/credit-calculator.

Furthermore, the credit comes with additional strings attached.  First, by law, it expires in six years and   starting in 2014, in order to be eligible, the company has to switch to one of the health insurance providers in their state’s exchange.

According to Cathcart, “If you keep your current health insurance provider- and most employees don’t want to change- you no longer qualify for the credit after 2013.”

Finally, the 20 million or so self-employed individuals in this country “aren’t eligible for the tax credit” at all, according to Brad Close, NBIB’s vice president of public policy.

Wordsworth owns eight small businesses, mostly restaurants and food service operations, each staffing   six to 100 employees.  He predicts that increased health insurance requirements are “probably going to be the largest cause of job losses.” That’s because firms with fewer than 50 employees don’t have to meet the new standards.  As a result, “if you have more than 40 [workers] you’re not going to expand or add employees.  If you have 58 employees, you’re going to get rid of some because of the cost of [government-mandated] health insurance.”

He also sees an increase in outsourcing.  Currently, Wordsworth has two meat-cutters on staff just to meet his exacting specifications for “the perfect N.Y. strip steak.”  If he has to lay them off in order to reduce the head count, “I’ll just tell Sysco to do it.”

And, don’t be surprised if you walk into a restaurant one day and get handed an iPad instead of a menu.  Technology is another way to reduce staffing.  “Let the customer touch what they want,” says Wordsworth. The message will be sent from the iPad to the kitchen, eliminating the wait staff since a busboy can deliver the food to your table.

Unfortunately, new federally-mandated health insurance requirements are not the only burden adding to the stress on businesses- especially small businesses today, check back next week for Part 2, other factors that are driving up economic uncertainty and driving down hiring.

1. Or, 50 half-time employees.

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.