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GAO: Fewer Small Employers than Expected Using Health Insurance Tax Credit

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Fewer small employers claimed the Small Employer Health Insurance Tax Credit in tax year 2010 than were estimated to be eligible, according to a report from the Government Accountability Office (GAO).

Out of an estimate of the eligible pool of 1.4 million to 4 million small employers, only 170,300 claimed it, the report found. The cost of credits claimed was $468 million. In 2010, most claims were limited to partial rather than full percentage credits (35% for small businesses) because of the average wage or full-time equivalent (FTE) requirements, the report found.

The credits were only a partial percentage of the base unless the business had more than 10 FTE employees or paid average annual wages over $25,000.

In addition, 30% of claims had the base premium limited by the state premium average, the report stated.

The GAO was asked to examine, among other things, the extent to which the credit is claimed and any factors that limit claims, including how they can be addressed and how fully the Internal Revenue Service (IRS) is ensuring that the credit is correctly claimed, by Congressional Republicans on key small business committees.

One factor limiting the credit’s use is the fact “that most very small employers do not offer health insurance,” perhaps to the tune of 83%, according to one estimate, the report stated. Moreover, “according to employer representatives, tax preparers, and insurance brokers that the GAO met with, the tax credit was not large enough to incentivize employers to even begin offering insurance.”

Complex rules on FTEs and average wages also limited its use while tax preparer groups said it took time needed to calculate the credit deterred claims, the report found.

In a letter to the Chairman of the Committee on Small Business Rep. Sam Graves, R- Mo., in the House of Representatives and Ranking Member of the Committee on Small Business and Entrepreneurship in the Senate, Sen. Olympia Snowe, R-Maine, said the GAO found that use of the tax credit has been lower than expected, with the available evidence suggesting that the design of the credit is a large part of the reason why.

The tax credit was designed to provide an incentive for small employers to provide health insurance, and to make insurance more affordable as part o the Patient Protection and Affordable Care Act (PPACA).

The National Federation of Independent Business (NFIB) is one of the parties that brought suit against PPACA in the case that the Supreme Court heard in March and will rule on in June.  However, its members have been divided on the issue of whether the tax credits are beneficial or not.  

“While the credit could be redesigned, such changes come with trade-offs. Changing the credit to expand eligibility or make it more generous would increase the revenue loss to the federal government,” the report concluded.

Insurers of small employers face higher per-employee fixed costs for billing and marketing and are less able to pool risk across large numbers of employees. As a result, plans offered to small employers are likely to have higher premiums or have less coverage and higher out-of-pocket costs than plans offered to large employers, the report found.

To address issues that would work within the existing framework of the PPACA as written, the GAO recommended that the IRS make improvements to instructions to examiners working on cases on the credit and analyze results from examinations of credit claimants and use those results to identify and address any errors.

The IRS, which had done outreach to make small businesses aware of the tax credit, agreed to offer more detailed instructions to examiners and more detailed data about examination results in a letter to the GAO sent on April 30.

As a footnote, beginning in 2014, eligible small employers can claim the tax credit for the two consecutive years beginning when the employer first offers employee health insurance from a state exchange.

Final regulations for implementing the individual health insurance purchase tax credit provisions in the Patient Protection and Affordable Care Act of 2010 (PPACA) are set to appear in the Federal Register Wednesday. See: