Fewer Small Employers Claimed the Credit Than Were Thought to Be Eligible Because of Factors Such as Credit Size and Complexity

		Actual Credit Claims Were Much Lower Than Initial Rough Eligibility Estimates

Fewer small employers claimed the credit for tax year 2010 than were  thought to be eligible based on rough estimates of eligible employers  made by government agencies and small business groups. The average credit amount claimed was about $2,700. Selected estimates, made by government agencies and small business  groups, of employers eligible for the credit range from around 1.4 million  to 4 million. Of the  approximately 170,300 small employers making claims for tax year 2010,  142,200—83 percent—could not use the full credit percentage. 3.) Furthermore, the 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. In addition, the surveys did not cover tax-exempt entities. IRS does not know whether its outreach efforts actually increased  awareness of the credit or were otherwise cost-effective. Addressing Factors and Expanding Credit Use May Require Substantive Design Changes

Given that most small employers do not offer insurance and what we  heard about the size of the credit not being big enough to incentivize  offering health insurance,credit use without changing the credit’s eligibility. SB/SE’s examination instructions address all of the credit’s requirements  for small businesses to claim the credit except that they do not include  specific instructions for examiners on determining eligibility of claimants  with non-U.S. addresses. Further, TEGE instructions for some of the credit’s  requirements have less detail compared to SB/SE’s instructions. However, without criteria to  assess the results in concert with these risks and resources, IRS is less  able to ensure that examination resources target errors with the credit,  rather than examining compliant claimants. IRS officials said they do not plan to use  data from examinations of other tax provisions to benchmark measures— such as the no-change rate or length of time an examination is open— because results would not be comparable. To answer research questions about the credits potential outcomes  shown in figure 5, the following are examples of data that might be  needed: number of small, low-wage employers offering health insurance,  before and after the credit was available; number of employees at small, low-wage employers, who have or  could obtain health insurance through their employers; and amount of annual health insurance premium costs for small, low-wage  employers before and after the credit. Policymakers’ conclusions about the questions to be answered by any evaluations of the credit’s effects would determine the  type of data that would need to be collected. 2. Related to the above analysis of examination results on the credit,  identify the types of errors with the credit that could be addressed with  alternative approaches, such as soft notices. IRS generally agreed with all four of our recommendations. Appendix I: Scope and Methodology

To assess the extent to which the Small Employer Health Insurance Tax  Credit (referred to in this report as the credit) is being claimed, we  obtained and analyzed Internal Revenue Service (IRS) data on the claims  on Form 8941 for tax year 2010. To identify any factors limiting credit claims, we interviewed groups  representing employers, tax preparers and insurance brokers and to  assess how these factors could be addressed, we analyzed our interview  results as well as relevant documents. To assess how fully IRS is ensuring that the tax credit is correctly claimed  by eligible employers, we reviewed IRS’s compliance plan and filters and  instructions for IRS staff conducting examinations, and compared these  documents with compliance practices used for prior tax provisions and  found in IRS strategic objectives. Appendix II: State Average Premiums for Small Group Markets for 2010 and 2011

The Small Employer Health Insurance Tax Credit is based on a  percentage of the lesser of (1) the premiums paid by the eligible small  employer for employees during the taxable year and (2) the amount of  premiums the employer would have paid if each employee were enrolled  in a plan with a premium equal to the average premium for the small  group market in the state (or in an area in the state) in which the  employer is offering health insurance.
Why GAO Did This Study

Many small employers do not offer health insurance. The Small Employer Health Insurance Tax Credit was established to help eligible small employersbusinesses or tax-exempt entitiesprovide health insurance for employees. The base of the credit is premiums paid or the average premium for an employers state if premiums paid were higher. In 2010, for small businesses, the credit was 35 percent of the base unless the business had more than 10 FTE employees or paid average annual wages over $25,000.
GAO was asked to examine (1) the extent to which the credit is claimed and any factors that limit claims, including how they can be addressed; (2) how fully IRS is ensuring that the credit is correctly claimed; and (3) what data are needed to evaluate the effects of the credit.
GAO compared IRS data on credit claims with estimates of eligible employers, interviewed various credit stakeholders and IRS officials as well as academicians on evaluation, compared IRS credit compliance documents with the rules and practices used for prior tax provisions and IRS strategic objectives, and reviewed literature and data.

What GAO Found

Fewer small employers claimed the Small Employer Health Insurance Tax Credit in tax year 2010 than were estimated to be eligible. While 170,300 small employers claimed it, 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 percent 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 percent of claims had the base premium limited by the state premium average.
One factor limiting the credits use is that most very small employers, 83 percent by one estimate, do not offer health insurance. According to employer representatives, tax preparers, and insurance brokers that GAO met with, the credit was not large enough to incentivize employers to begin offering insurance. Complex rules on FTEs and average wages also limited use. In addition, tax preparer groups 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 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 (1) do not address the credits eligibility requirements for employers with non-U.S. addresses and (2) have less detail for reviewing the eligibility of tax-exempt entities health insurance plans compared to those for reviewing small business plans. These omissions may cause examiners to overlook or inconsistently treat possible noncompliance. Further, IRS does 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, 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 credits 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.

What GAO Recommends

GAO recommends that IRS (1) improve instructions to examiners working on cases on the credit and (2) analyze results from examinations of credit claimants and use those results to identify and address any errors through alternative approaches. IRS agreed with GAOs recommendations.