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An ugly surprise for small businesses in the Health Care Reform Law

May 11, 2010

(By Scott Lyon, SBAM’s small business health care expert)

SBAM promises to keep you informed about health care reform as we learn about issues that will impact the small business community. We will report to you the good, the bad and the downright ugly. Today, I am reporting on the ugly.

As I have written before, health care reform that does not get at the root cause of the problem – cost – is not reform. If that is not bad enough, there is a provision buried in the law that, unless it gets corrected, will all but overwhelm many small businesses. This provision has nothing to do with the way Americans get health care or buy and pay for health insurance. This hidden “gem” has to do with 1099 tax forms.

Section 9006 of the law makes a couple of changes to how 1099s are issued. These changes will end up requiring businesses to distribute millions of additional 1099s each year; no wonder the IRS says it will need an extra 16,000 agents to deal with our new health care laws! The two changes that go into effect on Jan. 1, 2012 expand the scope of 1099s by using them to track payments not only to individuals, but now also to corporations, and it expands the use from services to include tangible goods. So, beginning in 2012, all companies must issue a 1099 to any individual or corporation if they buy more than $600 a year in goods and services from that person or corporation.

Think about what this change could mean for your business on both the sending and receiving end of 1099s. Here are a couple of examples from my end at SBAM. We lease the software that drives our COBRA administration program, so we will have to send this vendor a 1099. COBRA administration generates letters, bills and notices. Keeping our customers informed of what is going on and reminding COBRA participants that they owe premium, etc., ends up in a lot of paperwork which, in turn, requires printer ink, paper and envelopes. Thus, OfficeMax and a few local vendors will get a 1099 from us. I travel back and forth to Washington a few times a year; we will have to issue 1099s to Delta Airlines, and because I generally stay in the same hotels, the Hilton and Westin Hotel chains will get a 1099 from us.

By now you may be asking the usual questions of and why is this necessary and how did it end up in the health care bill? All good questions with one basic answer: follow the money.

During the health care debate, President Obama put a hard cap of $1 trillion on the legislation. At the end of the day, the bill was scored by the Congressional Budget Office (CBO) at just under that amount. But to get under $1 trillion, some tricks of the trade were used by the folks in Washington. I have previously written about a few of these including: the annual fees on pharmaceutical companies starting at about $2.5 billion a year, insurance carriers tax of $8 billion a year, and changes to flexible benefit plans limiting the amount a family can put away in a Section 125 plan, among others. 1099s seem to be another “revenue generator” for Washington to keep the costs of reform under $1 trillion by capturing unreported income to help offset the costs. Policymakers focused their attention on this revenue-raising measure that would, in effect, help pay for the tax cuts headed toward small businesses.

What happens next? First, the IRS needs to issue the regulations – the rules – and that isn’t expected until sometime next year. Second, Rep. Dan Lungren (R-Calif.) introduced legislation (H.R. 5141) to repeal this portion of the new health care law that will place an unnecessary and expensive paperwork burden on small businesses. Several staff and volunteers from SBAM will be traveling to Washington later this month. You can bet we will be talking with the Michigan delegation and urging support for Rep. Lungren and H.R. 5141.

(What do you think of this new 1099 provision? Leave a comment below or engage in our Forum)

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