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Despite Government Regulation in Business, Businesses Need to Stay Thriving

Businesses that are not growing are dying. As a business owner or manager, if you announce that you are purposely not growing, you are alerting your competitors that you have given up on the fundamental lifeblood of any business, growth. Businesses exist to grow. If you own or operate a business and have taken the position that you can no longer grow your business because of the ACA, you are guaranteeing success for your competitors.

I was recently asked whether the Affordable Care Act was a distinctively anti-business regulation.  Even assuming that it is, good business owners find a way. Businesses have found a way to survive regulation after regulation, year after year. True, employers can look at something like the ACA and see an obstacle, but everyone sees an obstacle.  The key to long-term business success is seizing opportunities when others refuse to even see them.  The Affordable Care Act provides many obstacles, but it is also an opportunity for innovative businesses to distance themselves from the unwilling or the unable to do the same. No one starts a a business to “get by.”  I spend considerable time with business owners.  I know that every business is started with the dream of longevity; longevity is earned and never simply given.  Being a business owner takes a certain level of gumption, a bit of arrogance, and a persistence to keep trying it your way when others around you simply go work for someone else.  People start businesses because they want the challenge.  The ACA presents that challenge, and now is time to separate the worthy from the unworthy.

Innovative, Long Term, and Successful Business Owners Navigate through the Red Tape of Government 

government regulation in business red tapeHistory teaches us that the most successful businessmen and women see not only opportunity where others see obstacles, but also that such employers seize those opportunities when they appear with both hands. When Vanderbilt and Thomas seized most of the railroads and tried to squeeze John D. Rockefeller out of business, Rockefeller built one of the first oil pipelines and revolutionized the way oil is transported in the United States. When everyone told Andrew Carnegie that building a bridge across the Mississippi could not be done with iron (at the time the typical building material), he built it out of steel and revolutionized building construction forever in the process. Later, when Edison’s electricity threatened Rockefeller’s kerosene empire, Rockefeller switched to gasoline right around the time that Henry Ford was introducing the Model T.

Successful business owners have an uncanny ability to adapt. Refusing to adapt to a changing marketplace is a surefire way to invariably one day close your business doors. Sooner or later, whether it be the Affordable Care Act or something else, every business owner is called upon to adapt to changed circumstances and solve problems.  This is what you sign up for when you become a business owner or operator.  For many employers, the Affordable Care Act is the first major piece of legislation that dramatically affects business operations.  This is your bridge that can’t be built, your oil that can’t be transported, your steel that cannot be inexpensively produced, this is your time.

Understanding the Key Points for the Affordable Care Act for Employers will give you a Competitive Edge

As an employer advocate, I can assure you that the ACA is tough legislation for employers (I am not trying to minimize the obstacles it creates for many employers).  Understanding exactly what is required is difficult (making adequate implementation even more difficult). Many employers are making decisions that will affect their long-term business success based on misinformation.

For example, I recently came across a news story showcasing a particular pet store.  The headline reads “Pet Store Scraps Expansion Because of $100k in New Costs from Obamacare.” The story begins by noting that the subject employer wanted to start two new locations for his pet business, but because of the ACA, that will no longer be possible.  The reason? Opening two more locations would push the pet store business into employing 50 employees. And the employer believes that having 50 employees would push the pet store into the ambit of the Affordable Care Act’s employer mandate and would force the pet store to insure all of its workers or pay $100,000.  The business owner then posits that “it’s just not worth it to us” to grow and to have to pay that $100,000. There are many glaring misunderstandings of the law in the news clip (perhaps it was edited that way for dramatic effect).

First, the employer mandate applies to employers that have 50 or more full-time employees or their equivalent. It does not apply to employers that employ fifty or more people.  The linked story is unclear as to whether the pet store’s employees are full-time, part-time, or seasonal. This is a very important variable.  The pet store could employ 100 people, but if those employees do not add up to 50 full-time employees or their equivalent, the employer could avoid being an Applicable Large Employer (“ALE”) and the ACA’s employer mandate.

Second, avoiding the $2,000 employer mandate penalty does not require that all employees be covered.  It requires that 95% of full-time employees be offered insurance coverage before penalties arise starting in 2016 (70% in 2015).  If the pet store has 30 full-time employees  (and the rest are part-time), only those full-time employees have to be offered coverage. Moreover, because there is only a requirement to offer, not cover, in practice an employee can be offered coverage and they could turn it down for various reasons.  For example, suppose a full-time employee that works at the pet store is married to an accountant that is offered great benefits by their employer, that pet store full-time employee is unlikely to accept the pet store’s offer of coverage and that decision creates no employer mandate penalties for the pet store.

Third, the employer mandate penalizes ALEs that do not offer health insurance to full-time employees (and their dependents).  It does not penalize employers for failing to cover, or even offer, non-full-time employees insurance coverage. So if an employer has 80 employees and 78 of them are part-time, none of those 78 employees can cause an employer any penalties.

Fourth, the yearly penalty is not $2,000 for every worker.  Again, it is $2,000 for every full-time employee that obtains government help on an exchange. So the pet store owner is mistaken to believe that an employer would multiply $2,000 times its 50 employees regardless of what type of employees the pet store owner employs.

government regulation in business affordable care actFifth, there is an employee discount in computing penalties that the pet store ignores.  In calculating penalties, the first 30 full-time employees are exempt from penalties (80 for employers with 100+ full-time employees or their equivalent in 2015). So if the pet store has 25 full-time employees, it would actually pay no penalties.  If it had 31, it would actually pay $2,000.  It is legally impossible for the pet store, with two added locations as planned, to pay $100,000 in fines.

Sixth, employer mandate penalties are assessed on an legal entity-per-entity basis.  So for example, if the pet store owner separated each pet store location into a separate corporate entity, the exposure would also be minimized.  Specifically, suppose the pet store business was divided into three corporations, Pet Store Inc., Pet Store II Inc., and Pet Store III Inc.  Each corporation has 18 employees.  Of those 18 employees, let’s say that 12 of them are full-time employees.  The 30-employee discount is then divided among the three entities (30/3 = 10 per corporation).

Practical Math in the Affordable Care Act: A Primer for Businesses Trying to Understand

Now the pet store has three corporations with 18 employees in each, 12 full-time employees in each corporation, and a 10-full-time employee discount at every corporation.  Assume no one at Pet Store II or III obtains government help on exchange.  Those companies will not pay any employer mandate penalties.  Suppose also that Pet Store Inc., has one full-time employee that obtains subsidized coverage on an exchange. For Pet Store Inc., the situation is dramatically different now that the penalties are being assessed over one-third of the entire workforce (as opposed to the entire workforce). Instead of paying employer mandate penalties of $12,000 for 6 full-time employees (36 – 30 = 6) as the pet store would if all of its employees were employed by one company (as the news story seems to imply), the newly organized pet store business would actually only be subject to penalties for 2 full-time employees (12 – 10 = 2) or $4,000.

I have no idea how much the volume of business the pet store is giving up by staying small, but anything above 4,000 is a net gain and worthwhile from a purely business perspective.  If I told you that opening up two new locations would yield another 40k a year in income in 2015 (with no penalty exposure whatsoever) and a maximum exposure of $4,000 per store in 2016, would you seriously say, “no thank you Mario, I want to stay small?”  You would be 80k (2 years x 40k = 80k) richer by the time you might be called upon to pay the 4k in 2016.  Heck, even if all three separate legal entities were penalized, it would still be only 12k ( (2 + 2 + 2) x $2,000).  So if you grew and garnered 80k more and took away the penalties (the maximum penalties that MIGHT develop), you would still be at a gain of 68k (80k – 12k). It is one thing to sit down and do the math and figure out that expansion is not financially advisable (by comparing the predicted increased revenue with potential penalty exposure), but is quite another to prematurely give up on the possibility.  To be sure, there is an element of risk, but that is what running a business is all about, assuming a risk that others will not and making a profit when the risk does not materialize (or finding a way to mitigate the risk in a way that makes you more competitive). It’s what makes it simultaneously exhilarating and terrifying to run a business.

Savvy employers can gain a competitive edge over competitors by knowing exactly what is required and adapting (especially when competitors refuse to adapt to the times). You sign up to adapt or die when you become a business owner or operator.  For many employers, the Affordable Care Act is the first major piece of legislation that dramatically affects business operations.  This is the bridge that can’t be built, the oil that can’t be transported, or the steel that cannot be inexpensively produced in mass quantities.  History teaches us that the bridge was built, the oil was transported, and the steel was inexpensively produced. Now it’s our turn to come up with a way to make it work.