Small Employer Health Insurance Tax Credit Not Enough

According to employer representatives, tax preparers, and insurance brokers that the U.S. Government Accountability Office (GAO) met with, the credit was not large enough to incentivize employers to begin offering insurance. Complex rules on full-time equivalents (FTEs) and average wages also limited use of the credit. In addition, tax preparer groups the GAO met with generally said the time needed to calculate the credit deterred claims.   

Options to address these factors, such as expanded eligibility requirements, have trade-offs, including less precise targeting of employers and higher costs to the federal government, the GAO said.  

While 170,300 small employers claimed the credit, estimates of the eligible pool by government agencies and small business advocacy groups ranged from 1.4 million to 4 million. The cost of credits claimed was $468 million. 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; 28,100 employers claimed the full credit percentage. In addition, 30% of claims had the base premium limited by the state premium average.  

The GAO also noted that the Internal Revenue Service (IRS) incorporated practices used successfully for prior tax provisions and from IRS strategic objectives into its compliance efforts for the credit. However, the instructions provided to its examiners did not address the credit’s eligibility requirements for employers with non-U.S. addresses and had less detail for reviewing the eligibility of tax-exempt entities’ health insurance plans compared to those for reviewing small business plans. These omissions may have caused examiners to overlook or inconsistently treat possible noncompliance. Furthermore, the IRS did not systematically analyze examination results to understand the types of errors and whether examinations are the best way to correct each type. As a result, the IRS is less able to ensure that resources target errors with the credit rather than compliant claimants.  

Currently available data on health insurance that could be used to evaluate the effects of the credit do not match the credit’s eligibility requirements, such as information to convert data on number of employees to FTEs. Additional data that would need to be collected depend on the questions policymakers would want answered and the costs of collecting such data.