The small employer health tax credit, which was established as part of the Affordable Care Act (ACA) to encourage eligible small employers to provide health insurance for employees, has so far had a limited effect, a recently released report by the Government Accountability Office (GAO) indicates.

The report, “Small Employer Health Tax Credit: Limited Use Continues Due to Multiple Reasons,” was presented as a testimony on March 22 by GAO director of strategic issues James R. McTigue, Jr., before the Subcommittee on Economic Growth, Tax and Capital Access of the House Committee on Small Business. The report stated that claims of the tax credit have continued to be lower than the number of potential claimants estimated to be eligible by government agencies and small business groups. The base of the credit is the premiums paid or the average premium for an employer’s state if the premiums paid are higher. In 2016, the credit is 50% of the base unless the business has more than 10 full-time equivalent (FTE) employees or pays average annual wages over $25,900.

According to the report, in 2014 181,004 employers claimed the credit, down somewhat from 188,303 in 2010. McTigue observed that these numbers are relatively low compared to the number of employers eligible for the credit: a GAO report from 2012 indicated that estimates of the number of eligible businesses ranged from 1.4 million to four million. In 2010, the GAO found that claims for the tax credit totaled $468 million, compared to initial estimates of $2 billion by the Congressional Budget Office and the Joint Committee on Taxation. McTigue added, however, that actual claims for the credit had increased slightly in recent years, to about $511 million in 2013 and $541 million in 2014.

The small employer health tax credit has not been widely claimed for a variety of reasons, McTigue said, including that the maximum amount of the credit does not appear to be a large enough incentive for employers to offer or maintain insurance, and that few small employers qualify for the maximum credit amount. For those employers who do claim the credit, he noted, the credit amount phases out to zero as businesses employ up to 25 FTE employees at higher wages. McTigue also pointed out that the amount of the credit is limited if the premiums paid by an employer are more than the average premiums for the small group market in the employer’s state, and that the credit can only be claimed for two consecutive years after 2013.

In addition, McTigue cited GAO research showing that small employers are deterred from claiming the tax credit because of the significant cost and complexity involved. Moreover, he said, surveys of small businesses have shown that many are unaware of the credit. Yet McTigue also noted that IRS has been taking steps since April 2010 to raise awareness about the credit, and to reduce the burden on taxpayers by offering tools to help businesses determine their eligibility for the credit.

Finally, McTigue pointed out that Congress and the administration have proposed a number of changes to the credit, including expanding the size of eligible employers, altering the phase-out rules, and allowing the credit to be claimed in more than two consecutive years.

Benefit Trends, Volume 59, Issue 4

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