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Small Business Digest


GAO Says Tax Credit To Encourage Small Business Healthcare Insurance Isn’t Working

In its polite way, the Government Accounting Office (GAO) has told government officials that an incentive program to encourage small businesses to offer employee healthcare insurance is badly flawed.

Further, despite its intended role and by GAO’s estimates, the program has failed to encourage a large percentage of employers to begin offering healthcare insurance to their employees. This is particularly true of very small employers, who in the words of the GAO, “don’t see the benefit of doing so.”

In 2010, just shy of 170,000 small businesses took the credit in the last reporting year with a vast majority, 135,000 having average salaries above $25,000.  For those small businesses with average salaries below $25,000 the total is 34,000.

The average credit amount claimed was about $2,700, according to GAO.

The effort was pushed by the Obama administration because employers do not commonly offer health insurance. Medical Expenditure Panel Survey (MEPS) estimates that 83 percent of employers who may otherwise be eligible for the full credit did not offer health insurance in 2010 and that 67 percent of employers who could be eligible for the partial credit did not offer the healthcare insurance.

Most discussion group participants and groups GAO interviewed found the tax credit to be complicated, deterring small employers from claiming it. The complexity arises from the various eligibility requirements, the various data that must be recorded and collected, and number of worksheets to be completed.

Another major complaint GAO heard centered on gathering information for and calculating Full Time Employees (FTE) and the health insurance premiums associated with those FTEs.

Eligible employers reportedly did not have the number of hours worked for each employee readily available to calculate FTEs and their associated average annual wages nor did they have the required health insurance information for each employee readily available.

Further hurting usage according to the GAO is the fact that the IRS has failed to provide auditors with consistent and thorough guidelines for evaluating such credits on returns.

GAO also said small employers do not likely view the credit as a big enough incentive to begin offering health insurance and to make a credit claim, according to employer representatives, tax preparers, and insurance brokers we met with. While some small employers could be eligible for the credit if they began to offer health insurance, small

business group representatives and discussion group participants told the GAO that the credit may not offset costs enough to justify a new outlay for health insurance premiums. GAO also said that related to this concern, the credit being available for 6 years overall and just 2 consecutive years after 2014 further detracts from any potential incentive for small employers to begin offering healthcare to their employees.

Also hurting adoption is the fact that because of limitations based on state average premiums also reduced some credit amounts by reducing the amount of the premium base against which the credit percentage is applied.

This premium base may be reduced when it exceeds the state average premiums for small group plans, as determined by HHS. If so, small employers are to use the state average amount, which in essence caps the premium amount used to calculate their credit.

According to IRS data, this cap reduced the credit for around 30 percent of employer

claims. The GAO gave as example, a nonprofit representative told it that her credit dropped from $7,900 to $3,070 because of the cap in her state.

The GAO report confirms a study done by the National Federation of Independent Businesses last year.

The full report is available at

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