Health-care costs have prevented many small firms from providing coverage for their employees. The new COBRA provision could bring even more problems.

Health care has become one of the biggest expenses for small business. In fact, the rising cost of health care has made it even more difficult for small business owners to offer coverage for their employees. According to the National Small Business Association (NSBA), the number of small-business owners who were able to provide health insurance to their employees dropped from 67 percent in 1995 to 38 percent in 2008.

In the NSBA’s March 2009 Health Care Survey of Small Business, more than one-fifth of small businesses said they had annual premium increases of more than 20 percent over the past four years. Last year, 28 percent reported an increase of 20 percent.

The price of health care has also kept some from growing their business. Earlier this year, one-third of the 1,000 small-business owners surveyed for credit card company Discover’s Small Business Watch said the price of insurance has a major impact on their ability to grow their business (via Inc.com).

The National Foundation of Independent Businesses (NFIB) says the cost of health insurance is a small-business owner’s most severe problem.

“We have to focus on getting these costs down,” Amanda Austin, senior manager of legislative affairs at NFIB, told Inc.com.

As of last month, a provision for COBRA (Consolidated Omnibus Budget Reconciliation Act) from the American Recovery and Reinvestment Act kicked in. Enacted in 1986, COBRA enables former employees to continue their health insurance coverage after they’ve been laid-off, terminated or left their jobs. However, they must pay 102 percent of the health care premium they had while employed, Entrepreneur Magazine says.

The new provision allows these terminated employees to keep the same coverage while only paying 35 percent of the premium cost. The remaining 65 percent of the cost will fall on their former employers, who have to pay it up front. The business owners can then withhold the amount of payments from their next federal payroll-tax contributions.

“Some companies are worried the federal requirement could cause cash-flow problems because of the up-to-three-month delay for reimbursement,” Sue Mathiesen, director of research at McGraw Wentworth, an employee benefits and consulting company, told Workforce Management last month.

As of April 18, 2009, companies are required to mail out the notices for COBRA coverage to eligible employees who have been laid off since Sept. 1, 2008. “The new regulation affects most companies with 20 or more employees,” Workforce Management adds.

“The big concern right now is how many people will elect this and where the money will come from,” Jennifer Kluge, COO of the Michigan Business & Professional Association, told Workforce Management. “Going through payroll taxes to get reimbursed is OK, but it is not cash to pay the premiums.”

The new COBRA subsidy’s effect on cash flow is yet to be seen, but it has the potential to sting small businesses with cash flow problems already. According to the National Association of Seed and Ventures Fund (NASVF), 90 percent of already-funded companies can’t get additional funds to move their businesses to the next level, Forbes reports.

To jump-start the flow of capital, NASVF partnered with Innovation America, a nonprofit that connects entrepreneurs with keepers of capital, to create the National Innovation Seed Fund of Funds (NISF). The NISF is conceptually a $2 billion seed fund, supported by tax dollars, of which $1.8 billion would go to entrepreneurs and the rest for managing the fund, Forbes says.

Another resource for cash-strapped small businesses requiring help to pay for health care, COBRA or other business expenses is the Small Business Association (SBA). The SBA offers multiple loan options, including microloans. Forbes also offers a list of ideas for raising cash, including factoring, consumer installment financing and merchant cash advances.

See Also: Microloans Serve as Small-Biz Lending Alternative

Resources

March 2009 Health Care Survey of Small Business
National Small Business Association, March 2009

Not Offering Healthcare Benefits?
by Kelly Faircloth
Inc. Magazine, Feb. 6, 2009

Rising Cost for Healthcare: Implications for Public Policy
by Louis F. Rossiter
National Foundation of Independent Businesses, April 2009

Stimulus Stings Some Businesses
by Dennis Romero
Entrepreneur Magazine, April 8, 2009

COBRA Worries Cash-Poor Businesses: Firms Must Pay Now, Wait for Reimbursement
by Jay Greene
Workforce Management, April 13, 2009

More Signs of Capital Starvation
by James A. Jaffe
Forbes, April 27, 2009

How to Raise Cash Now
by Maureen Farrell and Brett Nelson
Forbes, Jan. 30, 2009