Small Biz Health Tax Credit FlailsMarch 23, 2016
On the day before the six-year anniversary of the enactment of the Affordable Care Act (ACA), small-business owners and experts told members of the House Committee on Small Business Subcommittee on Economic Growth, Tax and Capital Access that one of the law’s key tax provisions has failed to help employees of small companies to get affordable health insurance coverage as promised. As the April 15th filing deadline for federal income taxes approaches, many small-business owners are expressing frustration as they try to provide health insurance to their employees under the confusing, costly new tax credit.
The hearing entitled, “Lip Service but Little Else: Failure of the Small Business Health Insurance Tax Credit” focused on that fact that a small-business health insurance tax credit was included to offset the cost to the employer. However, similar to other parts of the ACA, this credit is too cumbersome and poorly designed, leaving it is largely ineffective with few small businesses taking advantage of the credit.
Specifically, the Small Employer Health Insurance Tax Credit was established to help eligible small employers—businesses or tax-exempt entities—provide health insurance for employees. The base of the credit is premiums paid or the average premium for an employer’s state if premiums paid were higher. In 2016, for small businesses, the credit is 50 percent of the base unless the business had more than 10 full time equivalent (FTE) employees or paid average annual wages over $25,900.
A Government Accountability Office (GAO) report released at the hearing found that the take-up of the small employer health tax credit has continued to be lower than thought estimated, 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 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, and, as NSBA warned, a limited, narrow tax benefit isn’t enough incentive for a small firm to take on the huge cost and administrative burden of providing health insurance. 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.
Even so, 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.
Congress and the administration have proposed a number of changes to the credit. These include expanding the size of eligible employers, altering the phase out rules, and allowing the credit to be claimed in more than two consecutive years. Amending the eligibility requirements or increasing the amount of the credit may allow more businesses to claim the credit. However, these changes would increase its cost to the federal government.