ACA’s Small Business Tax Credit Goes Largely Unused

A incentive to provide coverage is considered too burdensome to be worthwhile

Stephen Miller, CEBS By Stephen Miller, CEBS March 29, 2016

The Small Employer Health Care Insurance Tax Credit was established under the Affordable Care Act (ACA) to provide eligible small businesses with an incentive to provide group health coverage for their workers. But a March 2016 report by the Government Accountability Office (GAO) finds that small firms haven’t been rushing to claim it.

In 2014, about 181,000 employers received the credit, down somewhat from 2010. This number is a small fraction of the number of small organizations eligible for the credit, estimated to range from about 1.4 million to 4 million, according to the GAO report Small Employer Health Tax Credit: Limited Use Continues Due to Multiple Reasons.

The credit is limited to employers with fewer than 25 full-time equivalent employees that pay an average wage of less than $50,000 a year, and that pay at least half of their employee health insurance premiums. To claim the credit, employers must purchase coverage through the ACA’s Small Business Health Options Program (SHOP) online exchange for their state.

The IRS issued a final rule on the small business health tax credit in June 2014.

The maximum credit is 50 percent of premiums paid for small business employers, or (at small nonprofit organizations) 35 percent of premiums paid for tax-exempt employers. The credit is available to eligible employers for two consecutive taxable years.

“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,” the GAO concluded.

The agency also found that the cost and complexity involved in claiming the tax credit was significant, deterring small employers from claiming it. And many small businesses reported that they were simply unaware of the credit.

“Amending the eligibility requirements or increasing the amount of the credit may allow more businesses to claim the credit,” the GAO said. “However, these changes would increase its cost to the federal government.”

What Went Wrong

“Despite efforts to encourage employers to provide health insurance and bolster the small group and individual markets, this premium tax credit helps with neither goal,” said Harold Jackson, executive chairman of Buffalo Supply Inc., a 20-employee small business located in Lafayette, Colo., in March 22 testimony presented to a U.S. House small business subcommittee on behalf of the U.S. Chamber of Commerce.

“When the Colorado Exchange ‘Connect for Health Colorado’ opened its Small Business Health Options Plan in 2015, I went online and tried to enroll,” Jackson testified, adding:

Unfortunately, the amount of information that the SHOP asked for in its online application process was incredible … . They wanted a lot of information about spouses and dependents that we don’t have or maintain—such as dependents’ and spouses’ Social Security numbers, dates of birth and tobacco use. It took me two or three days to gather up this information. I spent about 10 hours entering this information into the system, after which I couldn’t figure out how to review the plans available or get quotes. 

A SHOP representative referred Jackson to a broker, who told him, “I can get you a quote [for health insurance coverage], but I don’t want to go through the exchange, it’s too much hassle.”

Jackson called the requirement to go through the SHOP exchange to receive the credit “an onerous hoop.” Another hurdle for small business, he said, is the average-earning threshold of $50,000 per year, which he called “simply too low.”

On behalf of the U.S. Chamber, Jackson suggested several ways to make the tax credit more useful to small businesses, including by:

  • Offering the credit to small businesses that purchase coverage on or off the SHOP exchange.
  • Raising the average-earning level.
  • Making the tax credit available for more than two consecutive years.
  • Simplifying the application process.

“The rules for the tax credit are so confusing that small businesses cannot access [it] without hiring outside counsel,” Jackson concluded. “Ultimately, any change should not only increase the tax benefit to help small businesses provide health insurance for their employees, but must be simple and easily understood.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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