Far fewer small employers claimed the health insurance tax credit for small businesses in the health care reform law than were eligible, according to a new government report.
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The Small Employer Health Insurance Tax Credit was included in the Patient Protection and Affordable Care Act of 2010 as a way to help small businesses pay for the cost of health insurance. But the complexities of claiming the credit contributed to a relatively low popularity for the tax credit among both small businesses and their tax preparers. While 170,300 small employers claimed the tax credit in tax year 2010, estimates of the eligible pool by government agencies and small business advocacy groups ranged from 1.4 million to 4 million, according to a report released Monday by the Government Accountability Office. The cost of credits claimed was $468 million.
The base of the credit is premiums paid or the average premium for an employer’s state if premiums paid were higher. In 2010, for small businesses, the credit was 35 percent of the base unless the business had more than 10 full-time equivalent, or FTE, employees or paid average annual wages over $25,000.
Most claims were limited to partial rather than full percentage credits (35 percent for small businesses), according to the GAO, because of the average wage or FTE requirements. Only 28,100 employers claimed the full credit percentage. In addition, 30 percent of claims had the base premium limited by the state premium average.
One factor limiting the credit’s use is that most very small employers, 83 percent by one estimate, do not offer health insurance. According to employer representatives, tax preparers and insurance brokers that GAO met with, the tax credit was not large enough to incentivize employers to begin offering insurance. Complex rules on FTEs and average wages also limited use of the tax credits.
In addition, tax preparer groups that GAO met with generally said the time needed to calculate the credit deterred them from claiming it. Options to address these factors, such as expanded eligibility requirements, have trade-offs, including less precise targeting of employers and higher costs to the federal government.
The Internal Revenue Service incorporated practices that it used successfully for prior tax provisions and from IRS strategic objectives into its compliance efforts for the credit. However, the instructions provided to IRS examiners do not address the credit’s eligibility requirements for employers with non-U.S. addresses and contain fewer details for reviewing the eligibility of tax-exempt entities’ health insurance plans compared to those for reviewing small business plans. These omissions may cause examiners to overlook or inconsistently treat possible noncompliance. In addition, the IRS does not systematically analyze examination results to understand the types of errors and whether examinations are the best way to correct each type. As a result, the IRS is less able to ensure that resources target errors with the credit rather than compliant claimants, according to the GAO.
Currently available data on health insurance that could be used to evaluate the effects of the credit do not match the credit’s eligibility requirements, such as information to convert data on number of employees to FTEs. Additional data that would need to be collected depend on the questions policymakers would want answered and the costs of collecting such data.
The GAO recommended that the IRS improve the instructions for the tax credit to examiners working on cases on the credit and analyze the results from examinations of credit claimants and use those results to identify and address any errors through alternative approaches. The IRS agreed with GAO’s recommendations.
“The IRS agrees th at more detailed instructions to examiners and more detailed data about examination results would be helpful improvements to our program,” wrote IRS deputy commissioner for services and enforcement Steven T. Miller in response to the report.