Limited use of small employer tax credit continues

Government Accountability Office testimony before a House subcommittee indicated that claims for the Small Employer Health Tax Credit continue to be lower than the number of employers thought eligible for the credit by government agencies and small business groups, limiting the effect of the credit on the expansion of health insurance coverage through small employers. For instance, in 2014, only 181,004 employers claimed the credit, down from 188,303 in 2010. The GAO reports that the actual number of small employers eligible for the tax credit ranges from 1.4 million to 4 million.

The tax credit. The Small Employer Health Insurance Tax Credit was established by section 1421 of the Patient Protection and Affordable Care Act (ACA) to offer an incentive for small, low-wage employers to provide health insurance to their employees. The credit is generally available to eligible small employers and tax-exempt employers who have fewer than 25 full-time equivalent (FTE) employees with average annual wages that fall below a statutorily-specified cap. For tax year 2016, the wage cap is $51,800. Small employers must cover at least 50 percent of the cost of each of their employees’ self-only health insurance coverage to claim the credit. The credit amount is a percentage of the employer’s contributions to employees’ health insurance premiums.

Beginning in 2014, small employers who qualify for the credit generally must purchase coverage through a Small Business Health Options Program (SHOP) exchange. SHOP exchanges, as established under section 1311 of the ACA, are marketplaces where small employers can shop for and purchase health coverage for their employees.

Dollar value of credits. Similar to its analysis of the low usage figures, the GAO’s analysis of the dollar value of tax credits claimed is also lower than initial estimates. In 2010, claims totaled $468 million compared to initial estimates of $2 billion by the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT). In addition, in March 2012, the CBO and the JCT estimated that the credit would cost $1 billion in 2012 and $21 billion from 2012 to 2021, down considerably from the original estimate of $5 billion and $40 billion, respectively. The GAO report concludes that the revised estimates appear overstated, as well, given that actual claims for the credit in 2013 and 2014 were about $511 million and $541 million, respectively.

Reasons for low usage. The GAO offered the following explanations for why the tax credit has not been widely claimed by small employers:

• The maximum amount of the credit does not appear to be a large enough incentive for employers to offer or maintain insurance.
• Few small employers qualify for the maximum credit amount. For those employers who do claim the credit, the credit amount phases out to zero as employers employ up to 25 FTE employees at higher wages.
• The amount of the credit is limited if premiums paid by an employer are more than the average premiums for the small group market in the employer’s state.
• The credit can only be claimed for two consecutive years after 2013.
• The cost and complexity involved in claiming the tax credit is significant, deterring small employers from claiming it.
• Many small businesses have reported that they were unaware of the credit. This is true even though the Internal Revenue Service has been taking steps since April 2010 to raise awareness about the credit and reduce the burden on taxpayers by offering tools to help taxpayers determine eligibility for the credit.

Proposals to increase usage. The GAO reports that Congress and the Obama administration have proposed a number of changes to the credit. The most recent administration proposal would: (1) expand eligible employers to include those with up to 50 FTEs; (2) begin the phase-out at 20 FTEs; (3) provide for a more gradual phase-out based on average wage and number of employees; (4) eliminate the requirement that an employer make a uniform contribution for each employee; and (5) eliminate the limit imposed by the area average premium. Between 2011 and 2015, Congress has considered more than 20 bills on the small employer health tax credit.

GAO conclusions. The GAO concluded that utilization of the credit has been lower than expected due, in large part, to the design of the credit. While the credit could be redesigned to make it more generous, it would increase the revenue loss to the federal government.

SOURCE: GAO Report, GAO-16-491T, March 23, 2016.

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