Small Employer Health Tax Credit Not Working

The Small Employer Health Insurance Tax Credit was established as part of the Patient Protection and Affordable Care Act (ACA) to encourage eligible small employers—businesses or tax-exempt entities—to provide health insurance for employees.

A Government Accountability Office (GAO) report suggests the tax credit is not working as intended. According to the report, claims of the small employer health tax credit have continued to be lower than thought eligible by government agency and small business group estimates, limiting the effect of the credit on expanding health insurance coverage through small employers.

In 2014, about 181,000 employers claimed the credit, down somewhat from 2010. These numbers are relatively low compared to the number of employers eligible for the credit. In 2012, GAO reported that selected estimates of the number of employers eligible ranged from about 1.4 million to 4 million. In 2010, claims totaled $468 million compared to initial estimates of $2 billion by the Congressional Budget Office and the Joint Committee on Taxation. Actual claims for the credit in 2013 and 2014 increased slightly to about $511 million and $541 million, respectively.

The small employer health tax credit has not been widely claimed for a variety of reasons. As GAO reported in May 2012, the maximum amount of the credit does not appear to be a large enough incentive for employers to offer or maintain insurance. Also, 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 full time equivalent (FTE) employees at higher wages. The amount of the credit is also limited if premiums paid by an employer are more than the average premiums for the small group market in the employer’s state. Furthermore, the credit can only be claimed for two consecutive years after 2013.

GAO also found that the cost and complexity involved in claiming the tax credit was significant, deterring small employers from claiming it. Many small businesses have also reported that they were unaware of the credit. The Internal Revenue Service (IRS) 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.

While the GAO did not make recommendations in its testimony statement, in 2014, the Congressional Research Service (CRS) reported that the Obama Administration and some lawmakers have proposed to amend the small business tax credit to encourage and expand its use to more businesses. President Obama’s FY2014 budget proposed expanding and simplifying the credit. The budget recommended increasing the eligibility cut-off from 25 to 50 workers, changing the phase-out formula so more firms will qualify for at least part of the credit, and simplifying the calculation of the credit (by removing a requirement that an eligible employer pay a uniform percentage of the premium for each employee and also eliminating a cap on the credit based on the average health insurance premium in the employer’s state).

In addition, in the 113th Congress, the Small Business Health Care Tax Credit Improvement Act of 2013 (H.R. 3046) proposed to amend the tax credit to increase the maximum number of FTEs from 25 to 50, modify the phase-out of the credit, and repeal the limitation based on state health insurance premium averages. Another piece of legislation, the Small Business Tax Credits Improvement Act (S. 1325) also proposed to increase the maximum number of FTEs to 50, and increase the maximum wages cap to $37,500, among other provisions to increase the number of firms that could be eligible for the credit and the possible benefits awarded.

The full GAO testimony statement may be downloaded from here.