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Financial Planning > Tax Planning

PPACA Small Group Tax Credit Gets Off to Slow Start

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The Patient Protection and Affordable Care Act of 2010 (PPACA) already provides a tax credit that some employers can use to defray part of the cost of offering health coverage, but, so far, use of the tax credit has been much lower than expected.

Witnesses talked about the tax credit today at a hearing on the PPACA small business health insurance tax credit that was organized by the oversight subcommittee at the House Ways and Means Committee.

Members of Congress added the tax credit to PPACA in an effort to provide immediate relief for small for-profit and tax-exempt employers that mostly employ low-income and middle-income workers and pay half of the cost of single coverage for those workers.

For tax years from 2010 to 2013, the maximum tax credit amount is 35% for small businesses and 25% for tax-exempt organizations, according to Sarah Hall Ingram, the commissioner of the tax-exempt and government entities division at the Internal Revenue Service (IRS).

In 2014, the maximum credit will increase to 50% for small businesses and 35% for tax-exempt organizations.

The maximum credit goes to employers with 10 or fewer full-time equivalent (FTE) employees that pay average annual wages of $25,000 or less.

Employers that have 25 or more FTEs or pay average wages of $50,000 per year or more cannot qualify for the credit.

J. Russell George, Treasury inspector general for tax administration, reported that, through mid-October, only 309,000 of the 4.4 million taxpayers believed to be eligible for the credit have applied for it. The taxpayers that have applied have claimed $416 million in tax credits, or an average of $1,346 each.

The Congressional Budget Office had estimated taxpayers would claim $2 billion in small employer tax credits.

The IRS sent post cards to small businesses to tell them about the tax credit, but it did not have access to data that would show which of the small businesses were offering health plans and would likely be eligible for the credit, George said, according to a written version of his testimony posted on the Ways and Means website.

“Other factors, such as family members working as employees or the business failing to offer an appropriate health care plan might also cause businesses to be ineligible,” George said.

Patricia Thompson, chair of the tax executive committee at the American Institute of Certified Public Accountants (AICPA), Durham, N.C., said the current version of the tax credit cannot act as an effective incentive for employers to offer health coverage because employers rarely know whether they will qualify for it until the end of the year.

“Many of the variables (such as, the number of full-time equivalent employees and the hours worked per employee) are difficult to estimate early in the year,” Thompson said.

Even after the end of the year, determining whether an employer can qualify for the credit is complicated, Thompson said.

“It was not uncommon this year for tax preparers to have spent up to 20% of the time necessary to prepare an entire small business return just on the credit calculation, only to learn that the client did not qualify for the credit,” Thompson said. “As such, many small employers felt the entire process was a fruitless effort or wasted expense.”

Matthew Hisel, co-director of the Home ReSource, Missoula, Mont., appeared at the hearing to talk about his company’s experiences with actually using the tax credit.

The building materials recycler employs about 15 to 20 people and has been using the tax credit to help pay for health benefits, Hisel said.

In 2010, for example, the company spent $10,782 on health benefits, and the tax credit was about $2,000.

“For a small business struggling to maintain decent health coverage, that makes all the difference,” Hisel said. “We were actually considering dropping our health insurance this year, but the tax credit tipped the balance and helped us maintain our coverage.”

Hisel said he prepared the tax credit worksheet himself in about 10 minutes, and that he already had the information he needed to fill out the worksheet in his bookkeeping system. An accountant charged the firm $195 to fill out the final forms.

“So we paid $195 to get more than $2,000 back,” Hisel said.


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