Low exploitation rates for tax breaks intended to encourage small business owners to provide health insurance are prompting complaints that the credits aren’t practical.
Small business health insurance tax credits went into effect in March 2010 as part of the Patient Protection and Affordable Care Act that was a centerpiece of President Barack Obama’s early legislative agenda. A U.S. House Ways and Means oversight subcommittee recently scheduled a hearing on the credits to take place on Nov. 15 to explore whether the credit is “providing meaningful help to employers.”
The U.S. Treasury Inspector General for Tax Administration’s early numbers show that in the first year of the small business health insurance tax credit, approximately 228,000 small businesses claimed $278 million—only about 14 percent of eligible businesses. The number is incomplete because it was calculated in May and many small businesses file returns on extension in the fall. However, more recent estimates that $435 million in claims were filed still fall far short of Congressional Budget Office projections that taxpayers would claim up to $2 billion in 2010.
Since the disappointing figures were released, charges have been flying among small business advocacy groups, accounting organizations, and the government officials who conceived the credit as a way to encourage small business owners to provide insurance for their employees. A September 2011 Small Business Administration study shows that employees of small businesses are far less likely to be insured than those working for midsized and larger companies and that coverage costs small employers and their employees more.
A Political Tool?
The low participation rate was predictable, says William Dennis, senior research fellow at the National Federation of Independent Business Research Foundation in Washington. The NFIB has filed a legal challenge against the health-care legislation, claiming it is unconstitutional to mandate the purchase of health insurance. “It [the small business credit] was put in there as a talking point for political reasons; it wasn’t a serious thing. It was predestined to fail,” Dennis says.
Administration officials deny this, saying the credit was passed as a good-faith effort to bridge the gap for small employers until 2014, when they can sign up for insurance exchanges that will increase competition and theoretically bring costs down. Acting Assistant Treasury Secretary for Tax Policy Emily McMahon explained on her tax policy blog that it was no surprise that numbers for 2010 were low because by the time the legislation went into effect, most businesses were unable to adjust employee coverage to take advantage of the credit. More small businesses may claim the credit on their 2011 returns and beyond, she wrote.
McMahon also mentioned that the IRS is continuing its outreach to small employers, insurance brokers, accountants, and the tax software industry to improve awareness of the tax credits. This year, the IRS sent out 4.4 million postcards to small businesses notifying them they might be eligible for the tax break.
Tax preparers say it wasn’t lack of information about the credits that dampened participation, but the complex formula governing eligibility. The tax credit is generally available to business owners who pay for at least half the cost of employees’ insurance coverage, have fewer than 25 employees, and pay salaries that average less than $50,000 annually.
Eligibility Tough to Determine
Pat Thompson, a tax partner at Piccerelli, Gilstein & Co. in Providence and chair of the American Institute for Certified Public Accountants’s tax executive committee, says very few of her small business clients were eligible for the credit and fewer still were able to determine eligibility for themselves, using a worksheet her firm had designed. “The definition of an eligible business is challenging because it’s not based on [the number of] employees but on full-time equivalents,” she says. “For companies with a lot of part-timers … that’s not very transparent.”
Add in the requirement that different insurance plans—such as medical and dental—must be tested separately, then factor in the issue of average annual wages, she says, and the credit was just too difficult for business owners to decipher without help. The credit was cast narrowly to appeal to the companies least able to afford insurance, but those companies are probably also least likely to have their taxes done professionally. “If a person is trying to prepare their tax returns themselves, I don’t think they would even consider this credit,” Thompson says.
John Arensmeyer, chief executive officer of advocacy group Small Business Majority, which supported the health-care reform effort, blames the low participation on general confusion about the health-care reform act (to which the Supreme Court will hear a challenge this term), as well as resistance from the accounting community. “We’d like to see a renewed commitment on the part of all concerned—particularly organizations dedicated to supporting small business—to make sure we communicate to small businesses about the tax credit and make it as easy as possible to take advantage of it.”