Small Businesses Face Puzzle Over Health Insurance Penalties

By Martin Vaughan Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- Some small-business owners will face a dilemma, should Democratic health-care proposals become law: continue to offer health insurance to their workers, or pay a penalty that is less than the cost of providing that coverage. Rhonda Ealy, who owns the Strictly Organic Coffee Company, a fair trade, organic coffee roaster in Bend, Ore., says she provides health insurance to her employees because it is the right thing to do, and that probably won't change whatever new penalties are put into place. "We like to treat our employees like family," she said. Ealy said she spends about $45,000 per year to cover 15 full-time employees with a bare-bones plan. Her payroll last year was around $450,000--putting her business near the $500,000 threshold at which House of Representative bill's employer penalties kick in. If Ealy added two full-time positions by the time House legislation took effect, she would be over that threshold. She would likely then have to choose between paying for a more comprehensive plan, to meet minimum standards in the House bill, or paying an annual penalty of around $10,000. "I think it would be a horrible crime if I could just pay a penalty and that would cost me less than insurance," Ealy said in an interview. She said she would be inclined to continue to offer coverage. Democrats say their proposals hold great benefits for small employers. Insurance reforms, such as a ban on denial of benefits for pre-existing conditions and new state-run insurance exchanges, will provide new options for business owners who in the past were denied coverage or couldn't afford it. Ealy is one of more than 100 business owners that traveled to Washington Tuesday to lobby for Democratic health-care proposals, organized by left-leaning groups including the Main Street Alliance and U.S. PIRG. According to a study by the Lewin Group consulting firm, small-business owners who currently offer insurance to their employees would see annual health-care costs go down by $811, on average, if the House bill were to become law. That projected drop in costs is partly due to a small-business tax credit, which the House bill envisions being in effect for only two years. Jim Amaral, owner of Portland, Me., bakery Borealis Breads, said he spends between $40,000 and $50,000 per year to insure 10 employees, out of a total of 65 employed by his firm. He picks up 50% of the cost of employee premiums, not enough to avoid penalties under the House bill. Amaral would need to pay 72.5% of the total cost of premiums under the House bill to avoid a penalty of about $60,000. Amaral, who also participated in the Main Street Alliance lobbying day, said cost is only one factor in decisions about whether to offer health coverage. "It's accessibility, it's what kind of coverage they are getting," he said. "Philosophically, as a company owner I feel like I should be participating in providing health care for employees. Other small business owners see more pain than gain in Democratic health bills. Jim Henderson, owner of St.Louis-based Dynamic Sales Co. Inc., a supplier of construction and industrial materials, said he fears the initiatives will lead to higher taxes. "I think what is happening is, Congress is looking for a silver bullet," he said. "But the plan has to be paid for by someone." The National Federation of Independent Business, a small-business group that is fighting the House health-care bill in Washington, helped set up the interview with Henderson. Henderson has long offered employees health-care benefits but has scaled the offerings back over the years as costs have risen. He now contributes to health savings accounts on behalf of employees, and is considering dropping those and setting up a self-insured catastrophic fund. At payroll of $265,000 last year, Henderson's firm would escape penalties under the House bill. But he noted that his employees are paid partly on commission, so payroll can vary widely from year to year. Henderson would not likely qualify for tax credits to offset health insurance costs, because average employee pay exceeds $40,000. -By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com