If you claimed the Small Employer Health Insurance Tax Credit last year, congratulations. You are one of few employers who not only qualified but persevered through complex calculations.
Health care tax credit too complex for employers
According to a report issued this month by the U.S. Government Accountability Office, fewer than 12 percent of the businesses that were expected to claim the credit in 2010 did so. The GAO study, conducted at the request of Senate Small Business and Entrepreneurship Committee ranking member Olympia Snowe (R-ME) and House Small Business Committee Chairman Sam Graves (R-MO), found that 170,300 small businesses claimed the credit in 2010 at a cost of $468 million.
The numbers fall far below the estimates of government agencies and small business advocacy groups, which suggested that between 1.4 million and 4 million businesses would be eligible to claim the credit and that the cost of the credit would come to $2 billion in fiscal year 2010 and $40 billion from fiscal years 2010 to 2019.
According to two earlier studies conducted by the Kaiser Family Foundation and the National Federation of Independent Businesses, which is seeking to overturn the President's health care reform bill, only half of small businesses were even aware of the credit in May 2011, a year after Congress authorized it. But even among the half who knew about it, few claimed the credit.
To qualify for the credit, a small business must employ fewer than 25 full-time-equivalent employees, pay average annual wages of less than $50,000 per FTE, and uniformly pay at least 50 percent of the cost of premiums for enrolled employees. The value of the credit varies based on several factors including wages and number of employees.
The GAO reported that a factor limiting the credit's use was that as many as 83 percent of very small employers do not offer health insurance, and therefore do not qualify. Employers' representatives, tax preparers, and insurance brokers told the GAO that the credit was not large enough to be an incentive to employers to offer insurance.
GAO also reported that some employers who do offer health insurance were unable to claim the credit due to complex rules regarding full-time equivalent employees and average wages. For others, the time required to calculate the credit was not worth the amount they would collect, according to tax preparers who spoke to GAO.
"It is discouraging that so many small companies are still burdened by compliance with the health care law," Congressman Graves and Senator Snowe said in a statement. "The President claimed that the health care tax credit would help small businesses deal with the weight of this massive law, but, according to this study, it has been grossly ineffective."
Graves and Snowe suggested that the GAO report confirms the tax credit is "too complex" and did not provide a significant solution to small businesses' long-term compliance problems. "The health care reform law is simply bad policy that is holding small businesses back, and therefore should be repealed. The data shows that a miniscule tax credit won't change this dynamic," they said.