Many Small Employers Ineligible for Affordable Care Act Tax Credit

Although up to 4 million small employers may have been eligible to claim the Small Employer Health Insurance Tax Credit in 2010, only 170,300 small employers actually claimed the credit, according to a recent report from the Government Accountability Office (GAO). The report, Small Employer Health Tax Credit: Factors Contributing to Low Use and Complexity, http://www.gao.gov/products/GAO-12-549 noted that few small employers took advantage of the credit because most do not offer health insurance. According to the report, employers, tax preparers and brokers explained that the tax credit, alone, was not enough of an incentive for small businesses to begin offering insurance.

The tax credit, created by the Patient Protection and Affordable Care Act (ACA), allows a credit of up to 35 percent of premium costs for small employers who offered health insurance. Under the provision, an eligible small employer may claim a tax credit if it makes nonelective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of its participating employees.

Aside from these issues, eligible small employers failed to claim the credits because of complex rules on full-time equivalents (FTEs) and average wages. Others declined to take advantage of the tax credit citing the amount of time needed to calculate the credit deterred claims.

To remedy these issues, the GAO recommended that the IRS improve instructions to examiners working on the credit and analyze results from examinations of credit claimants and use those results to identify and address any errors.