From the May 2010 issue of Investment Advisor • Subscribe!

May 1, 2010

For Small Businesses, Confusion and Added Costs

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Of all the debate about healthcare reform, the effect on small businesses seems to have generated the most confusion. Some small business owners appear pleased by the prospect of government assistance to offer health insurance to employees. But many other business owners are concerned about how much aid they will, or won't, get. A third group is angry that they may have to fork up thousands of dollars for health insurance when they are struggling just to keep their businesses afloat.

"I think small business owners, not surprisingly, are very scared by the bill," said David Kelly, managing director and chief market strategist at J.P. Morgan Funds. "Because small business owners, who tend to be rather fiscally conservative and entrepreneurial, get very nervous about government mandates."

Basically, employers who have more than 50 employees must offer health insurance benefits or pay penalties starting in 2014. Companies with 25 or fewer employees who meet certain wage requirements will also be able to get credits toward buying health insurance. The 51-employee trigger that unleashes potential penalties has left the small business community worried and angry.

"I think there were a lot of things in the bill to protect small business owners, although the irony of the thing is that it may actually encourage small businesses to stay small and not expand," Kelly said. "So it really doesn't make a lot of sense, but it'll probably get revised."

Bernard Kiely, president of Kiely Capital Management, a RIA firm in Morristown, New Jersey, said that the potential penalties will just add to the burden of doing business. Kiely, who runs his firm with his wife Yvonne, said many businesses that usually have 25 employees or fewer and where the average wage is $50,000 or less, like landscapers, contractors, and restaurant owners, will have to provide health insurance or pay a penalty.

"The penalty is not that big, so a lot of people will say it's just another cost of business," Kiely said. "It's another reason small businesses can't cut it in this country."

Kelly, though, taking a holistic economic view, said that recent positive reports on the economy, particularly the increase in nonfarm employment, appeared to show that small businesses, especially startups, were hiring workers and were not scared off by the specter of healthcare costs.

"Some may not like it," Kelly said, "but it won't be enough to stop the natural entrepreneurial spirit of American small business to get it going in a recovery, and I think we're beginning to see signs of that."

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