Better healthcare can ease the small business hiring crisis. Congress must help.

Note: I wrote this piece with my Gusto colleagues Liz Wilke, Principal Economist, and Jeanette Quick, Head of Compliance and Public Policy.

As we head into a third year of the pandemic, U.S. small and medium businesses have not gotten the relief they expected. Instead, they are struggling with the worst surge in COVID-19 cases yet and a persistent hiring crisis.

Small and medium businesses generate 44% of all U.S. economic activity, but they’re struggling to find enough workers—a problem exacerbated by the difficulty and cost associated with offering health insurance to employees. Nearly half of candidates see health insurance as a deciding factor in accepting a job, and in this market, they can walk away from roles that lack basic benefits. Yet data from Gusto’s 200,000+ small and medium business customers shows that most businesses with fewer than 50 employees do not provide health insurance to their workers at all. For many, it is both prohibitively expensive and a logistical maze.

To help solve the hiring crisis for the country’s millions of small businesses, lawmakers must make it easier for them to offer employees affordable, quality health insurance. Here are three ways to do that.

1. Restructure premium tax credits for small businesses

For small and medium business owners, health insurance is both a way to keep their employees safe during the pandemic and a competitive offering in a cutthroat job market. But offering it is tremendously difficult and expensive, especially for the smallest businesses.?

The Affordable Care Act created the Small Business Health Options Program (SHOP) to help every small business offer health insurance, but it is not working as intended. Strict requirements make its biggest incentive–tax credits for small and medium businesses that offer health insurance–inaccessible to most companies. Those that qualify can only collect tax credits for two years, while their employees lose the tax credits they would receive to buy insurance on the individual marketplace for as long as they are employed.

To remedy this, Congress should abolish the two-year limit and make employees’ tax credits available to any small business that chooses to offer health insurance. By combining credits that employees would otherwise receive with any contribution the employer can afford, businesses could cover more of employees’ premiums–helping them compete for talent.

2. Eliminate the employee income cap as a tax credit requirement

Another way to help small and medium businesses offer affordable health insurance is by easing the tax credit eligibility requirements.?

Currently, for a business to qualify for health insurance tax credits, its employees must have an average annual income under $50,000. This makes many businesses ineligible: for instance, most of Gusto’s customers don’t qualify for these tax credits.?

Eliminating employee income as a tax credit eligibility requirement altogether would help more employees access affordable company-sponsored health insurance. By making this change, Congress can help small and medium businesses protect their employees’ health, compete in the job market and retain their staff.

3. Seal the cracks in the Health Reimbursement Arrangement (HRA) system

For many owners, the easiest way to help employees access health insurance is by offering certain HRAs that give employees money to buy insurance on their own in the individual marketplace.

Providing his employees with Qualified Small Employer HRAs (QSEHRAs) helped Mazin Sidahmed, co-founder of nonprofit news site Documented, hire during the pandemic. In 2020, he experienced a business surge and needed workers at a time when jobs were scarce. But he didn’t feel comfortable not offering health insurance for roles that require regular in-person interaction. Providing HRAs helped him hire the talent he needed and keep his employees safe.

The HRA system is valuable, but has major flaws. When an employee receives money in a QSEHRA or Individual Coverage HRA, they lose an equivalent amount from their tax credits on the individual exchange. If their employer offers enough, the employee can even lose all tax credits for their whole family. This means some employees actually lose money to buy insurance when they receive an HRA, while their employer is effectively wasting money.

Any funds a business offers through an HRA should supplement the employee’s individual tax credit. Ideally, it would be 100% additive–in other words, money in an HRA would have no impact on the employee’s individual tax credit. (This change wouldn’t put small and medium businesses’ health insurance offerings on par with their larger counterparts, but it’s an important first step to free up funds for them to contribute to employees’ premiums.) This would meaningfully decrease what employees pay for coverage, helping these businesses attract and retain talent.

Small and medium businesses are integral to the U.S. economy. The pandemic has taken an enormous toll on them, causing at least 200,000 to close permanently in 2020 alone. Now, a hiring crisis is putting many more at risk. Affordable health insurance is key to helping these businesses attract and retain talent, and Congress must help them offer it.