The tax credit designed to make it easier for small businesses to offer health insurance is underused, says a new government report.
The Small Employer Health Insurance Tax Credit, created under the 2010 Affordable Care Act, became available to small employers—businesses or tax-exempt entities—for the tax years beginning Jan 1, 2010. It’s available to companies that have 25 or fewer workers, pay average salaries of $50,000 or less and cover at least half of employee health insurance premiums.
The credit was projected to apply to between 1.4 million and 4 million small businesses, but only 170,300 employers used the credit, according to the General Accounting Office report. The cost of the tax credits claimed: Just $468 million, compared with the $2 billion projected cost.
Barriers to Entry
One big factor limiting the use of the tax credit was that most very small employers (83 percent, according to one estimate the report cited) don’t offer health insurance. Such companies said the size of the credit was not a big enough incentive for them to provide insurance—and complicated eligibility criteria didn’t help much. The credit is based on premiums paid or the average premium for an employer’s state if the premiums paid were higher. In 2010, for small businesses, the credit was 35 percent of the base.
The GAO was asked to examine the extent to which the credit was claimed, plus any factors that limited claims and how those could be addressed. (It was also asked to investigate how fully the Internal Revenue Service is ensuring that the credit is claimed correctly.)
Of the some 170,000 claims, just 28,100 of those were for the full percentage credit. All of the others were partial (with the average credit being $2,700) often because the businesses did not meet the average wage or full-time equivalent requirements.
An Accounting Labyrinth
Another problem: The credit is complicated to claim. According to the report, “tax preparer groups GAO met with generally said the time needed to calculate the credit deterred claims.” (Among the less-than-straightforward formulas: In some cases there are workers that count as 1/15th as an employee, for example.)
Observed the report: “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.”
Orrin Hatch (R–Utah), the ranking member of the Senate Finance Committee, cited the GAO report as confirming his view of the president’s health care law as being "confusing, expensive, and burdensome for the families and businesses that have to comply with it.” Hatch added, “It’s no surprise that the very part of the law that the White House said would help small businesses is too difficult and complex for small businesses to take advantage of. And that’s before the worst parts of the law for America’s job creators come into effect."
President Obama has suggested some changes to the program, but of course it’s possible it all could be moot, depending on how the U.S. Supreme Court rules in the case challenging the 2010 law's constitutionality. A ruling is expected next month.
Did you claim the health care credit? What has been your experience with it?
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