	Fewer Small Employers Claimed the Credit Than Were Thought to Be Eligible

Claims of the small employer health tax credit have continued to be lower  than thought eligible by government agency and small business group  estimates, 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 (see figure 1). These numbers are relatively low compared to the number of employers  thought eligible for the credit. In 2012, we 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 (CBO) and the Joint Committee on Taxation (JCT). The revised  estimates appear overstated as well given that actual claims for the credit  in 2013 and 2014 were about $511 million and $541 million,  respectively. Small Employers Have Been Unlikely to Claim the Health Tax Credit for Various Reasons Maximum Small Employer Credit Amount is Too Small

Based on our interviews, discussion groups, and literature review  conducted for the 2012 report, we found the small employer health tax  credit has not provided a strong enough incentive for employers to begin  to offer health insurance for various reasons, as discussed below. The maximum amount of the credit does not appear to be a large enough  incentive to get employers to offer or maintain insurance. The amount of the credit is also reduced if premiums paid by an employer  are more than the average premiums for the small group market in the  state in which the employer offers insurance. Our 2012 report also noted that the complexity involved in claiming the  tax credit was significant, deterring small employers from claiming it. Lack of Awareness May Contribute to Low Credit Claims, Although IRS Engaged in Significant Outreach

Many small businesses reported that they were unaware of the credit, as  discussed in our 2012 report. Amending the eligibility requirements or increasing the amount of the  credit may allow more businesses to claim the credit, but as we noted in  2012, these changes would increase its cost to the federal government. Options for changing the design of the credit include the following:  increasing the amount of the full credit, the partial credit, or both;  increasing the amount of the credit for some by eliminating state  premium averages; expanding eligibility requirements by increasing the eligible number of  FTEs and wage limit for employers to claim the partial credit, the full  credit, or both; or  simplifying the credit calculation by (1) using the number of  employees and wage information already reported on the employer’s  tax return, which could reduce the amount of data gathering as well as  credit calculations because eligibility would be based on the number  of employees rather than FTEs; and (2) offering a flat credit amount  per FTE (or per employee) rather than a percentage. For example, the bills sought to increase the number of  eligible small employers (e.g., allowing an employer to have 50 FTEs);  changing the phase out formula; allowing the credit to be claimed in more  than two consecutive years; increasing the average annual wage  limitation; eliminating the requirement that employers contribute the same  percentage of cost of each employee’s health insurance; eliminating the  cap limiting the credit amount to average premiums paid to a state health  insurance exchange; and allowing a partial credit for health insurance  purchased outside of SHOP exchanges.
Why GAO Did This Study

Many small employers do not offer health insurance. The Small Employer Health Insurance Tax Credit was established as part of the Patient Protection and Affordable Care Act 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 FTE employees or paid average annual wages over $25,900.
This statement summarizes and updates GAO's prior work in May 2012, November 2014, and March 2015 on the extent to which the credit is claimed, any reasons that limit claims, and changes to the credit proposed by Congress and the administration. To conduct the updates, GAO reviewed 2013 and 2014 IRS data on credit claims and academic and government studies, and summarized proposed legislation related to the credit.

What GAO Found

Claims of the small employer health tax credit have continued to be lower than thought eligible by government agency and small business group estimates, 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 (see figure). 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 full time equivalent (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. 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) had 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.

What GAO Recommends

GAO is not making recommendations in this testimony statement.