To Ease Proprietors Health Costs

November 27, 2002
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GRAND RAPIDS — A local CPA says the Ways and Means Committee of the U.S. House of Representatives has taken under advisement recommendations to make health insurance affordable to small business owners.

Paul Hense, who chairs the tax committee of National Small Business United (NSBU), said he’s not holding his breath about when Congress might ease the U.S. Tax Code’s discrimination against business owners.

“And if something is enacted,” he added, “the whole thing won’t go into effect overnight.”

But Hense did say that committee staffers with whom he met — at their urging — for several hours last month had been unaware of the discrimination that the code imposes on small business owners and that they were interested in “marking up” changes which NSBU is recommending.

The same applies to a Department of Treasury undersecretary for tax policy with whom Hense also had a conference in October.

The local CPA told the Business Journal that the discrimination he mentions is glaring when one compares the status of a government employee and an entrepreneur earning the same pay.

“The government employee receives his health insurance for nothing,” Hense explained, “and he pays taxes only on his income.

“And that’s often the case with employees of major corporations,” he added, noting that those corporations routinely deduct the cost of employees’ health insurance as just another cost of doing business.

“But not the little guy who runs his own company,” Hense said. “Not only must he pay his health insurance premium, which in some areas of the country might be as much as $10,000, but — and here’s where the tax code really, really soaks him — he also still must pay the full 15 percent Social Security tax on that expense. That’s another $1,500.”

“So the government employee is sailing along without spending a penny for health insurance,” he said. “The corporate guy is doing nearly as well.

“But the man or woman operating a small business is really getting hurt. And the government worker is guaranteed a great pension, but the little guy doesn’t have that much left to put away.”

In terms of health insurance, federal tax law discriminates against the sole proprietor in another sense — a severe limitation on Section 125 benefits for the owner.

“I’ve literally seen situations where a woman operates a business and she hires a friend. Well, let’s say they both need health insurance but the owner has kids.

“The employee can use Section125 for her whole premium, but not the owner. She’s subject to a 5 percent Section 125 limitation, and that’s far too small for her premiums. So she has to buy health insurance and pay co-pays and deductibles with after-tax dollars.


But not her employee.”

He said the discrimination on the part of the tax code is part of the iron law of unintended consequences that grows out of federal legislation.

“Nobody in Washington meant for this to happen,” he said. “And, as a matter of fact, nobody in Washington even knew it was happening until NSBU starting bringing it to their attention.”

Hense said he believes the genesis of tax discrimination against sole proprietors lies in widespread anger in the ’50s about the fact that physicians were able to deduct so many business expenses.

“Way back when I was in high school,” Hense said, “a lot of people were mad about doctors making so much money and getting to write off their cars, their trips, the office expenses and so forth.

“So some genius passed an amendment to the tax code to make things tougher on the doctors.

“It didn’t hurt the doctors,” Hense added. “Oh, sure, they gripe about all the taxes they pay, but with the kind of money they make now, it doesn’t really hurt them.”

But he said an unintended consequence of the tax law is that it makes operation of small businesses extremely difficult for the entrepreneurs who start them.

“That’s why when a single mom comes to me about starting a business” Hense added, “I really have to warn her about it.”

In addition to liberalizing the tax code’s Section 125 privileges for business owners and making owners’ health insurance premiums deductible against Social Security taxes, Hense said NSBU had one other recommendation for immediate action.

The proposal would end the discrimination against business owners in tax-deferred retirement plans. Currently, the law permits a proprietor to set aside only about a third of the funds that a corporate worker can.

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