Health Costs on His Mind Small Factory Owner Looks for Ways to Cope With New Law

Sales at Automation Systems LLC, a parts-assembly factory in the Chicago suburbs, dropped 60% following the 2008 financial collapse. Owner Carl Schanstra was able to get the firm back on its feet by breaking into new markets, such as the auto industry. Sales are up 12% this year, and are likely to rise again next year, too.

But for the 34-year-old, the expected growth in sales brings a new concern. He is worried that as Automation Systems continues to expand, it will be subject to a provision in the health-care overhaul that could damage its bottom line.

Mr. Schanstra is contemplating various strategies he can take next year in order to sidestep what he believes are significant burdens of complying with the law. In fact, he’s considering whether he should split his manufacturing firm in two.

That is because his plant, with sales of about $1.6 million for 2012, currently employs 40 full-time workers, mostly low-paid employees who monitor the factory equipment. If sales were to continue to rise, the plant could, conceivably, employ 50 full-time workers in 2014. Under the new health-care law, the Affordable Care Act, businesses with 50 or more full-time equivalent employees will be required, starting in that year, to offer workers health insurance or potentially pay a penalty.

The expense, he says, would drive up the cost of his labor. So he doesn’t want to let employment at the factory reach that number. “I’ll be hammered for having more people at work,” says Mr. Schanstra, who took over the firm when his father died in 2003.

Splitting the business into two would be a “headache,” he acknowledges. But with fewer than 50 full-time equivalent employees in each half of this business, he hopes to avoid paying the penalties that otherwise could amount to at least $40,000 a year. His firm hasn’t offered health-insurance benefits since 2003, when premiums jumped 50%, bringing his yearly outlay for coverage for his staff of 20 people to about $40,000 total.

The Checkup

Automation Systems LLC weighs whether to add workers as Affordable Care Act nears

  • Sales of $1.6 million for 2012, up 12% this year and expected to rise next year
  • 40 full-time employees, 10 shy of the 50 that would trigger health-care requirement
  • Penalty for not offering 50 or more full-time workers health insurance: At least $40,000

Source: The company

Legal and tax experts say breaking up a firm—as Mr. Schanstra is contemplating—generally won’t allow a business owner to stay outside the parameters of the law. According to the Internal Revenue Code, all workers who are employed by a common group of corporations or business partners must be treated as being employed by a single owner.

But an owner could potentially create a spinoff entity if his or her business has more than one revenue stream, and if there are different owners for each entity, says Peter Fleming, a partner with Carnegie, Pa.-based accounting firm Wilke & Associates LLP. He recommends exploring other options first. “The spinoff move is a big step,” he says, because it requires surrendering a portion of the company over to someone else.

Small-business experts say it isn’t surprising that some business owners are thinking of splitting their firms or taking other steps to eschew the health-care overhaul due to the associated costs and regulatory burdens. “It’s a very legitimate question to ask, should I try to find a way to get under the 50-employee threshold,” says Alden Bianchi, a partner with law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in Boston. Providing health insurance is “a compensation cost and it’s the job of the business owner to minimize costs,” he adds.

Exploring far-reaching strategies to dodge the employer mandate isn’t uncommon, adds Katie Mahoney, executive director of health-care policy at the U.S. Chamber of Commerce, because, for some business owners, “it’s a matter of dollars and cents and they don’t have it. They find a way around it or they close their business.”

Average premiums for family health-insurance plans have increased 97% since 2002, according to a September study conducted by nonprofits Kaiser Family Foundation and Health Research & Educational Trust.

Business owners have other less-radical options for maneuvering around the law’s provisions.

Some say they’re likely to reduce their workers’ hours or even lay off staff in order to remain below the thresholds established under the act. Under the law, firms with 50 or more full-time-equivalent employees will have to provide “minimum essential” and “affordable” coverage, or pay a penalty for each employee in excess of 30 full-time employees.

Sidney Brodsky, chief executive officer of James Gerard Foods, a gourmet food business in Phoenix with roughly 50 employees, says he is considering “weeding out” his weakest performers to reduce his firm’s head count to below 50 full-time equivalents. He would then bring on contract workers, should he need more help.

Mr. Brodsky has offered health-care benefits to his employees for the past 12 years, though he only contributes 50% toward their premiums. By hovering under the law’s employee threshold, he can continue to offer health benefits to his employees without having to worry about meeting the “minimum essential” mandate. In order to avoid penalties, employers must offer a plan that covers at least 60% of the of the actuarial value of the cost of the benefits. In addition, employers must not charge the employee more than 9.5% of his or her household income toward the cost of health-insurance premiums.

Others plan to shift to part-time workers, because there are no penalties if part-time employees aren’t offered coverage.

Mr. Schanstra says he is thinking of bringing in a partner to take over one half of the business, should he divide it. He is also considering opening a factory in South America—and focus his growth there—catering to industries in that region. “I want to see where the cards fall,” he says. “Splitting the company is not off the table.”

Mr. Schanstra is aware that dividing his business into two may not help him dodge the law’s requirements. His backup plan, if he can’t split his firm, is to keep his head count low or to invest in machinery that would replace workers. He also plans to raise prices as much as 20% starting in January to buffer any health-care related costs he may incur in 2014.

Getting part-time staff is “not a really good functional way for us to operate our business,” he says, because of how employees’ shifts, which rotate 24 hours a day, are scheduled for optimal productivity.

“The unknown makes everyone stop spending and start saving,” he says. “We will be more cautious and leaner and tighten up.”

Corrections & Amplifications
Under the Affordable Care Act, employers with 50 or more full-time equivalent employees more must offer a health plan that covers at least 60% of the of the actuarial value of the cost of the benefits. In addition, employers must not charge the employee more than 9.5% of his or her household income toward the cost of health-insurance premiums. A previous version of this article stated that employers are required to pay 60% of the total cost of the plan’s benefits.

*Modified from a Wall Street Journal Article by Emily Maltby and Sarah Needleman

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