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What is a "small business"?

by Tony Novak, MBA, MT, OnlineAdviser at Freedom Benefits revised 11/16/11

The definition of “small business” varies depending on the context. The most commonly questioned contexts are 1) eligibility for federal, state and local programs, 2) eligibility for group health insurance, 3) determination of tax filing status, and 4) eligibility for commercial services. This article addresses some of these determination issues.

Small Business Administration

With few exceptions, all Federal Agencies, and many state and local governments, use the size standards established by SBA. The most common size standards are as follow:

500 employees for most manufacturing and mining industries
100 employees for all wholesale trade industries
$28.5 million for most general & heavy construction industries
$12 million for all special trade contractors
$0.75 million for most agricultural industries

About one-fourth of industries have a size standard that is different from these levels. They vary from $0.75 million to $28.5 million for size standards based on average annual revenues and from 100 to 1500 employees for size standards based on number of employees.¹

COBRA

COBRA is a federal law that allows an extension of health benefits to a company’s former employees or dependents. COBRA is only available to companies with more than an average of 20 employees. This limitation is applied without regard to industry or other factors.

Note that this usually means that businesses with less than 20 employees that extend health benefits to former employees do so outside of the law (illegally) and if the benefits are insured, then this is usually in violation of the group insurance policy. The exclusion also applies to churches and religious organizations. For more information, see www.cobraplan.com

Group Health Insurance

Questions usually focus on the minimum size of a business that may qualify for group health insurance. The reason for this is that group insurance is the easiest and most common way to avoid medical eligibility requirements of individual-type insurance. Under group plans, employees are eligible for insurance regardless of medical history. The minimum business size varies from on to three employees (including an owner/employee), depending on the state. In most cases a business that pays state unemployment tax on at least one employee meets the minimum size requirements. The maximum size may also vary depending on the state but most laws that govern small business group health insurance apply to businesses with less than 50 employees. Note that most group health insurance has additional eligibility requirements other than size of business. A few group health insurance plans have more liberal eligibility requirements.

Commercial Services

Each provider of business services is able to determine the target group for the service. This often involves setting a minimum and maximum size. For example, companies like 401kGold that provide 401(k) support services may set a maximum number of employees that qualify under a specified fixed fee payment. Other organizations like Freedom Benefits that provides 401(k) and other employee benefit services charge based on the number of employees, so no distinction is necessary. For more information, see www.freedombenefits.org .

Footnotes

¹ www.grants.gov

Tony Novak is a member of the Pennsylvania Institute of Certified Public Accountants, the New Jersey Society of Certified Public Accountants and an accredited member of the Better Business Bureau.

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