SMALL EMPLOYER
HEALTH TAX
CREDIT
Factors Contributing
to Low Use and
Complexity
Report to Congressional Requesters
May 2012
GAO-12-549
United States Government Accountability Office
GAO
United States Government Accountability Office
Highlights of GAO-12-549, a report to
congressional requesters
May 2012
SMALL EMPLOYER HEALTH TAX CREDIT
Factors Contributing to Low Use and Complexity
Why GAO Did This Study
Many small employers do not offer
health insurance. The Small Employer
Health Insurance Tax Credit was
established 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 2010,
for small businesses, the credit was 35
percent of the base unless the
business had more than 10 FTE
employees or paid average annual
wages over $25,000.
GAO was asked to examine (1) the
extent to which the credit is claimed
and any factors that limit claims,
including how they can be addressed;
(2) how fully IRS is ensuring that the
credit is correctly claimed; and (3) what
data are needed to evaluate the effects
of the credit.
GAO compared IRS data on credit
claims with estimates of eligible
employers, interviewed various credit
stakeholders and IRS officials as well
as academicians on evaluation,
compared IRS credit compliance
documents with the rules and practices
used for prior tax provisions and IRS
strategic objectives, and reviewed
literature and data.
What GAO Recommends
GAO recommends that IRS
(1) improve instructions to examiners
working on cases on the credit and
(2) analyze results from examinations
of credit claimants and use those
results to identify and address any
errors through alternative approaches.
IRS agreed with GAO’s
recommendations.
What GAO Found
Fewer small employers claimed the Small Employer Health Insurance Tax Credit
in tax year 2010 than were estimated to be eligible. While 170,300 small
employers claimed it, estimates of the eligible pool by government agencies and
small business advocacy groups ranged from 1.4 million to 4 million. The cost of
credits claimed was $468 million. Most claims were limited to partial rather than
full percentage credits (35 percent for small businesses) because of the average
wage or full-time equivalent (FTE) requirements. As shown in the figure, 28,100
employers claimed the full credit percentage. In addition, 30 percent of claims
had the base premium limited by the state premium average.
Number of Small Employers Claiming the Full and Partial Credit Percentages, by FTE and
Wage Requirements for the Credit, Tax Year 2010
Notes: This information is based on the approximately 170,300 small employer claims. Numbers are
rounded to the nearest hundred. Numbers don’t add up because of rounding.
One factor limiting the credit’s use is that most very small employers, 83 percent
by one estimate, do not offer health insurance. According to employer
representatives, tax preparers, and insurance brokers that GAO met with, the
credit was not large enough to incentivize employers to begin offering insurance.
Complex rules on FTEs and average wages also limited use. In addition, tax
preparer groups GAO met with generally said the time needed to calculate the
credit deterred claims. Options to address these factors, such as expanded
eligibility requirements, have trade-offs, including less precise targeting of
employers and higher costs to the Federal government.
The Internal Revenue Service (IRS) incorporated practices used successfully for
prior tax provisions and from IRS strategic objectives into its compliance efforts
for the credit. However, the instructions provided to its examiners (1) do not
address the credit’s eligibility requirements for employers with non-U.S.
addresses and (2) have less detail for reviewing the eligibility of tax-exempt
entities’ health insurance plans compared to those for reviewing small business
plans. These omissions may cause examiners to overlook or inconsistently treat
possible noncompliance. Further, IRS does not systematically analyze
examination results to understand the types of errors and whether examinations
are the best way to correct each type. As a result, IRS is less able to ensure that
resources target errors with the credit rather than compliant claimants.
Currently available data on health insurance that could be used to evaluate the
effects of the credit do not match the credit’s eligibility requirements, such as
information to convert data on number of employees to FTEs. Additional data
that would need to be collected depend on the questions policymakers would
want answered and the costs of collecting such data.
View GAO-12-549. For more information,
contact James R. White at (202) 512-9110 or
Page i GAO-12-549 Small Employer Health Tax Credit
Letter 1
Background 3
Fewer Small Employers Claimed the Credit Than Were Thought to
Be Eligible Because of Factors Such as Credit Size and
Complexity 9
IRS Is Implementing Several Practices from Prior Compliance
Efforts, but Additional Steps Could Be Taken 18
Data to Evaluate Many Questions about the Effects of the Credit
Are Not Available 25
Conclusions 27
Recommendations for Executive Action 28
Agency Comments and Our Evaluation 29
Appendix I Scope and Methodology
31
Appendix II State Average Premiums for Small Group Markets for 2010 and 2011
34
Appendix III Adjustments in Counting Total Small Employer Claims and Total
Credit Amount Claims for Tax Year 2010 36
Appendix IV Credit Claims by Employer Size and Wages Paid, Tax Year 2010
37
Appendix V Form 8941 and Worksheets for Claiming the Small Employer Health
Insurance Tax Credit 38
Appendix VI Publically Available Data on Small Employer Health Insurance
41
Appendix VII Comments from the Internal Revenue Service
43
Contents
Page ii GAO-12-549 Small Employer Health Tax Credit
Appendix VIII GAO Contact and Staff Acknowledgments 46
Tables
Table 1: Examination Actions for Form 8941 as of February 2012,
for Tax Year 2010 23
Table 2: State Average Premiums for Small Group Markets for 2010
and 2011 34
Table 3: Publically Available Data on Small Employer Health
Insurance 41
Figures
Figure 1: Percentage of Employers with Low-Wage Employees That
Offer Health Insurance, 2000 through 2010, by Employer
Size 3
Figure 2: Phaseout of the Credit for Small Businesses as a
Percentage of Employer Contributions to Premiums, for
2010 to 2013 7
Figure 3: Percentage and Number of Small Employers Claiming the
Full and Partial Credit Percentages, by FTE and Wage
Requirements for the Credit, Tax Year 2010 11
Figure 4: Form 8941 and Credit Calculations on Worksheets
Related to IRS’s “3 Simple Steps” for Determining
Potential Eligibility 14
Figure 5: Model of Potential Outcomes and Influential Factors for
the Small Employer Health Insurance Tax Credit 26
Figure 6: Number of Credit Claims by Taxpayer Type, Tax Year
2010 36
Page iii GAO-12-549 Small Employer Health Tax Credit
Abbreviations
CBO Congressional Budget Office
COBRA Consolidated Omnibus Budget Reconciliation Act
FTE full-time equivalent
HHS Department of Health and Human Services
IRS Internal Revenue Service
JCT Joint Committee on Taxation
MEA Math Error Authority
MEPS Medical Expenditure Panel Survey
NFIB National Federation of Independent Businesses
PPACA Patient Protection and Affordable Care Act
SBA Small Business Administration
SBM Small Business Majority
SB/SE Small Business and Self-Employed Division
TEGE Tax Exempt and Government Entities Division
TETR Telephone Excise Tax Refund
TIGTA Treasury Inspector General for Tax Administration
This is a work of the U.S. government and is not subject to copyright protection in the
United States. The published product may be reproduced and distributed in its entirety
without further permission from GAO. However, because this work may contain
copyrighted images or other material, permission from the copyright holder may be
necessary if you wish to reproduce this material separately.
Page 1 GAO-12-549 Small Employer Health Tax Credit
United States Government Accountability Office
Washington, DC 20548
May 14, 2012
The Honorable Olympia J. Snowe
Ranking Member
Committee on Small Business and Entrepreneurship
United States Senate
The Honorable Sam Graves
Chairman
Committee on Small Business
House of Representatives
Many small employers do not offer health insurance to their employees.
This is particularly true for small employers paying low wages. According
to data from the Medical Expenditure Panel Survey (MEPS)
1
To provide an incentive for small employers to provide health insurance,
and to make insurance more affordable, Congress included the Small
Employer Health Insurance Tax Credit (referred to in this report as the
credit) in the Patient Protection and Affordable Care Act (PPACA).
about 17
percent of employers with less than 10 employees who earn low wages
(50 percent or more of their employees earn $11.50 per hour or less)
offered health insurance to their employees in 2010, while about 90
percent of employers with 100 to 999 employees who earn low wages
did.
2
1
MEPS is a set of large-scale surveys. MEPS is administered by the Agency for
Healthcare Research and Quality in the Department of Health and Human Services. The
2010 Insurance Component survey had a response rate of about 83 percent for private
establishments, and 38,409 respondents, including for-profit, and nonprofit employers;
government units are excluded from these statistics.
The
credit is available for tax years beginning after December 31, 2009 to
certain employers with employees earning low wages— small business
and tax-exempt entities—that pay at least half of their employees’ health
insurance premiums. The Congressional Budget Office (CBO) and the
Joint Committee on Taxation (JCT) jointly estimated that the credit would
2
Pub. L. No. 111-148, §§ 1421, 10105, 124 Stat. 119 (Mar. 23, 2010), (codified at 26
U.S.C. § 45R).
Page 2 GAO-12-549 Small Employer Health Tax Credit
cost $2 billion in fiscal year 2010 and $40 billion from fiscal years 2010 to
2019.
3
You asked us to review the implementation of the credit. Specifically, we
examined
• to what extent the credit is being claimed and what factors, if any, limit
employer claims, and how these factors can be addressed;
• how fully the Internal Revenue Service (IRS) is ensuring that the
credit is correctly claimed by eligible employers; and
• what data are needed to evaluate the effects of the credit.
To describe the extent to which the credit is being claimed, we reviewed
IRS data on the claims for tax year 2010. To identify any factors that may
limit credit claims and to assess how they could be addressed, we
interviewed IRS officials as well as groups representing employers, tax
preparers, and insurance brokers, and worked with them to assemble
discussion groups on the credit. To assess how these factors could be
addressed, we analyzed our interview results as well as relevant
documents. Where possible, we identified IRS or MEPS data related to
the factors. To assess how IRS is ensuring that the tax credit is correctly
claimed by eligible employers we reviewed its compliance plans for the
credit and compared them to practices used successfully for prior tax
provisions
4
We conducted this performance audit from July 2011 through May 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
and IRS strategic objectives. We interviewed IRS officials on
their compliance efforts. To assess what data would be needed to
evaluate the effects of the credit, we conducted a literature review and
interviewed interest groups and subject matter specialists from
government, academia, research foundations and think tanks. We found
the data we used to be sufficiently reliable for the purposes of our report.
3
CBO, letter to the Honorable Nancy Pelosi, Speaker of the U.S. House of
Representatives (Washington, D.C.: Mar. 18, 2010).
4
For example, see GAO, Tax Refunds: Enhanced Prerefund Compliance Checks Could
Yield Significant Benefits, GAO-11-691T (Washington, D.C.: May 25, 2011).
Page 3 GAO-12-549 Small Employer Health Tax Credit
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. (See app. I for our scope and
methodology.)
Small employers with low-wage employees do not commonly offer health
insurance, compared with large employers with low-wage employees, as
shown in figure 1.
Figure 1: Percentage of Employers with Low-Wage Employees That Offer Health
Insurance, 2000 through 2010, by Employer Size
Notes: Figure includes for-profit and nonprofit (tax-exempt) entities but not government entities. A
low-wage employer is defined as an employer that has 50 percent or more of its employees earning a
low wage (earning $11.50 per hour or less, which is an annual salary of, at most, about $23,920).
Data were not collected for the MEPS Insurance Component for 2007.
Background
Small Employer Health
Insurance Market
Page 4 GAO-12-549 Small Employer Health Tax Credit
A combination of factors explains why small, low-wage employers tend
not to offer health insurance.
5
• For very low-wage employees, such as minimum wage employees,
6
health insurance drives up total compensation costs for employees.
• Low-wage employees working for small employers generally prefer to
receive wages over insurance benefits as part of total compensation.
On one hand, while employees pay both income and employment tax
on wages, employees do not have to pay income or employment
taxes on premiums paid by their employers for health insurance.
However, for low-wage employees, the income tax exclusion is worth
less relative to cash wages than for higher-income employees
because low-wage employees may be in a lower income tax bracket.
7
• Insurers of small employers face higher per-employee fixed costs for
billing and marketing
8
and are less able to pool risk
9
5
For additional description of challenges for small employers providing coverage, see
GAO, Private Health Insurance: Small Employers Continue to Face Challenges in
Providing Coverage,
across large
numbers of employees. As a result, plans offered to small employers
GAO-02-8 (Washington, D.C.: Oct. 31, 2001).
6
In general, the federal minimum wage is $7.25 per hour. Many states also have minimum
wage laws and minimum wages vary from state to state.
7
See Quantria Strategies/Small Business Administration, Health Insurance in the Small
Business Market: Availability, Coverage, and the Effect of Tax Incentives (Cheverly, Md.:
September 2011).
8
CBO estimated that for firms with 25 or fewer employees, 26 percent of premiums goes
toward insurers’ administration costs, compared with 7 percent for firms with at least 1,000
employees; see CBO, Key Issues in Analyzing Major Health Insurance Proposals
(Washington, D.C.: December 2008).
9
Risk pooling spreads risk across a group; a larger pool stabilizes the average insurance
costs. Smaller risk pools raise costs because insurers run the risk of insuring those with
relatively high health care needs. As a result, insurers may increase premiums to better
ensure that they can cover unexpectedly large health care costs.
Page 5 GAO-12-549 Small Employer Health Tax Credit
are likely to have higher premiums or have less coverage and higher
out-of-pocket costs than plans offered to large employers.
10
IRS’s Small Business and Self-Employed Division (SB/SE) and Tax
Exempt and Government Entities Division (TEGE) are primarily
responsible for implementing the credit. IRS works with the Department of
Health and Human Services (HHS) and the Small Business
Administration (SBA) on implementation tasks, such as outreach and
communication.
To be eligible, an employer must:
• Be a small business
11
or tax-exempt employer
12
located in or having
trade or business income in the United States and pay premiums for
employee health insurance coverage issued in the United States.
• Employ fewer than 25 full-time-equivalent (FTE)
13
employees in the
tax year (excluding certain employees, such as business owners and
their family members).
14
10
The average deductible in 2010 per employee enrolled in a single (employee only)
health insurance plan was $1,421 for employers with fewer than 10 employees; $1,420 for
employers with 10 to 24 employees, $1,513 for employers with 25 to 99 employees,
$1,155 for employers with 100 to 999 employees, and $738 for employers with 1,000 or
more employees, according to MEPS. A deductible is the amount of expenses that must
be paid out-of-pocket before an insurer will pay any expenses.
11
For purposes of this credit, a business includes those that are corporations in a
controlled group of corporations, or members of an affiliated service group, as well as
partnerships, sole proprietorships, cooperatives and trusts. A sole proprietor is an
individual who owns an unincorporated business but may employ others.
12
The credit is available to tax-exempt employers described in 26 U.S.C. § 501(c) and
exempt from tax under 26 U.S.C. § 501 (a).
13
To calculate FTEs, the total hours of service must be determined for all individuals
considered employees. There are a number of methods that can be used to determine the
hours worked, but the hours are limited to 2,080 per employee. The total number of hours
of service is divided by 2,080 to arrive at the FTE number.
14
Other exclusions are seasonal employees, unless they work for the employer on more
than 120 days in the tax year, and ministers who are deemed to be self-employed.
Leased
employees are included in FTE calculations.
IRS Implementation and
Requirements for
Calculating and Claiming
the Credit
Page 6 GAO-12-549 Small Employer Health Tax Credit
• Pay average annual wages of less than $50,000 per FTE in the tax
year.
15
• Offer health insurance and pay at least 50 percent of the health
insurance premium under a “qualifying arrangement.” This means that
the employer uniformly pays at least 50 percent of the cost of
premiums for enrolled employees, although IRS did develop relaxed
criteria for meeting this requirement for tax year 2010.
16
The President’s fiscal year 2013 budget request contains a proposal for
expanding the credit’s eligibility criteria to include employers with 50 or
fewer FTEs and removing the uniform contribution requirement.
The amount of the credit that employers can claim depends on several
factors. Through 2013, small businesses can receive up to 35 percent
and tax-exempt entities can receive up to 25 percent of their base
payments for employee health insurance premiums; these portions rise to
50 percent and 35 percent, respectively, starting in 2014. Employers can
receive the full credit percentage if they have 10 or fewer FTEs and pay
an average of $25,000 or less in annual wages; employers with 11 to 25
FTEs and average wages exceeding $25,000 up to $50,000 are eligible
for a partial credit that “phases” out to zero percent of premium payments
as the FTE and wage amounts rise. Figure 2 shows the phaseout of the
credit for small businesses; the phaseout for tax-exempt entities follows a
similar pattern, up to 25 percent of health insurance premiums.
15
Wages for the employees included in the FTE calculations are included in average wage
calculations except for minister’s wages which are not subject to Social Security or
Medicare tax.
16
IRS offered a transition rule on the “qualifying arrangement” criteria for tax year 2010
and for satisfying the uniformity requirement. IRS Notice 2010-44.
Limits on the Credit Amount
Page 7 GAO-12-549 Small Employer Health Tax Credit
Figure 2: Phaseout of the Credit for Small Businesses as a Percentage of Employer Contributions to Premiums, for 2010
to 2013
Note: GAO adapted the graphic from Congressional Research Service, Summary of the Small
Business Health Insurance Tax Credit Under PPACA (P.L. 111-148) (Washington, D.C.: Apr. 5,
2010).
Further, the amount of the credit is limited if the premiums paid by an
employer are more than the average premiums determined by HHS for
the small group market in the state in which the employer offers
insurance. The credit percentage is multiplied by the allowable premium
to calculate the dollar amount of credit claimed. For example, in Alabama,
the state average premium was $4,441 for a single employee in 2010. If
an employer claiming the credit in Alabama paid $5,000 for a single
employee’s health premium, the credit would be calculated using the
state average premium of $4,441 rather than the actual premium paid.
Appendix II shows the average premiums by state.
The proposal in the President’s Budget suggests beginning the phaseout
at 21 FTEs, rather than 11, as well as providing for a more gradual
Page 8 GAO-12-549 Small Employer Health Tax Credit
combined phaseout for the credit percentages and removing the state
market limits.
Employers are to calculate the credit amount on IRS Form 8941, “Credit
for Small Employer Health Insurance Premiums.” Small businesses are to
claim the credit as part of the general business tax credit (on Form 3800),
and use it to offset actual tax liability. If they do not have a federal tax
liability, they cannot receive the credit as a refund but may carry the credit
forward or back to offset tax liabilities for other years.
17
Credit amounts
claimed by partnerships and S corporations are to be passed through to
their partners and shareholders, respectively,
18
who may claim their
portions of the credit on their individual income tax returns.
19
Employers that claim the credit can also deduct health insurance
expenses on their tax returns but must subtract the amount of the credit
from the deduction. Employers can claim the credit for up to 6 years—the
initial 4 years from 2010 through 2013 and any 2 consecutive years after
2013 if they buy insurance through the Small Business Health Option
Programs, which are part of the insurance exchanges to be established
under PPACA.
Tax-exempt
entities are to claim the credit on Form 990-T, “Exempt Organization
Business Income Tax Return,” and receive the credit as a refund even
though the employer has no taxable income.
20
17
The unused credit for small businesses may be carried back 1 year or forward up to 20
years. Credits cannot be carried back to a year prior to the effective date of the credit; any
unused credit amounts for 2010 can only be carried forward. See IRS Notice 2010-44.
18
Owners of S corporations are referred to as shareholders. S corporations are
corporations that “pass through” gains and losses to shareholders’ individual tax returns
without generally paying taxes at the entity level. Similarly, partners receive pass through
income and losses from a partnership.
19
For partners and shareholders, the credit is to be entered on the Schedule K-1 to be
filed with an income tax return.
20
PPACA requires the establishment of exchanges in each state by January 1, 2014,
which are to help eligible individuals and small employers compare and select insurance
coverage from among participating health plans. See Pub. L. No. 111-148, § 1311(b), 124
Stat. 119, 173 (Mar. 23, 2010).
Process for Claiming the Credit
Page 9 GAO-12-549 Small Employer Health Tax Credit
Fewer small employers claimed the credit for tax year 2010 than were
thought to be eligible based on rough estimates of eligible employers
made by government agencies and small business groups. IRS data on
total claimants, adjusted to account for claims by partners and
shareholders, show that about 170,300 small employers made claims for
the credit in 2010.
21
Selected estimates, made by government agencies and small business
groups, of employers eligible for the credit range from around 1.4 million
to 4 million. However, data limitations mean that these estimates are
necessarily rough. Based on our review of available data sources on the
three basic eligibility rules for the credit—involving wages, FTEs, and
health insurance—it is not possible to combine data from various sources
to closely match these rules. (See app. VI for details.) Though statistical
modeling corrects for imperfect data to match these rules, models are not
precise. While acknowledging the data limitations, several entities
produced estimates of the number of employers potentially eligible for the
credit. The Council of Economic Advisors estimated 4 million and SBA
(See app. III for adjustments to determine claims filed
by employers.) The average credit amount claimed was about $2,700.
Limited information is available on the distribution of claim amounts for
business entities because IRS focuses its data collection on the
taxpayers filing credit claims, who may be partners or shareholders
claiming their portions of a business entity’s credit. Appendix III provides
additional detail.
21
The number of employees who had their premiums paid by employers that claimed the
credit was about 770,000.
Fewer Small
Employers Claimed
the Credit Than Were
Thought to Be Eligible
Because of Factors
Such as Credit Size
and Complexity
Actual Credit Claims Were
Much Lower Than Initial
Rough Eligibility Estimates
Page 10 GAO-12-549 Small Employer Health Tax Credit
estimated 2.6 million.
22
Other groups making estimates included small
business groups such as the Small Business Majority (SBM) and the
National Federation of Independent Businesses (NFIB). Their estimates
were 4 million and 1.4 million, respectively.
23
A similar pattern is seen when the dollar value of credits actually claimed
is compared to initial estimates. The dollar value of claims made in 2010
was $468 million compared to initial cost estimates of $2 billion for 2010
(a CBO and JCT joint estimate).
24
Most of the claims were for less than the full credit percentage. Of the
approximately 170,300 small employers making claims for tax year 2010,
142,200—83 percent—could not use the full credit percentage. Usually
employers could not meet the average wage requirement to claim the full
percentage, as about 68 percent did not qualify based on wages but did
meet the FTE requirement. (See fig. 3.)
25
22
The Council of Economic Advisors is an agency within the Executive Office of the
President charged with offering objective advice on the formulation of domestic and
international economic policy, and SBA is a government agency that offers a variety of
programs and support services to help small businesses.
23
The estimate for SBM and SBA included nonprofits. The estimate for NFIB was only for
small businesses; it is not known whether the estimate for the Council of Economic
Advisors included nonprofits in addition to businesses.
24
CBO and JCT recently reduced their original estimates of the future costs of the credit to
a cost of $1 billion in 2012 and a cost of $21 billion from 2012 to 2021. These estimates
were previously $5 billion in 2012 and $40 billion from 2012 to 2021.
25
See app. IV for a graph of claimants with fewer than 10 FTEs and the amount of full
credits.
Most Small Employer
Claims Were Reduced
Because of the Phaseout
Rules and Some Were
Reduced by the State
Average Premiums
Page 11 GAO-12-549 Small Employer Health Tax Credit
Figure 3: Percentage and Number of Small Employers Claiming the Full and Partial
Credit Percentages, by FTE and Wage Requirements for the Credit, Tax Year 2010
Notes: This information is based on the approximately 170,300 small employer claims. Numbers are
rounded to the nearest hundred. Numbers and percentages do not add to totals because of rounding.
State average premiums also reduced some credit amounts by reducing
the amount of the premium base against which the credit percentage is
applied. This premium base may be reduced when it exceeds the state
average premiums for small group plans,
26
as determined by HHS. If so,
small employers are to use the state average amount, which in essence
caps the premium amount used to calculate their credit. According to IRS
data, this cap reduced the credit for around 30 percent of employer
claims. For example, a nonprofit representative told us that her credit
dropped from $7,900 to $3,070 because of the cap in her state. (See app.
II for small group average premiums in all states.)
26
A small group plan is a health coverage plan sponsored by small employers for the
employees.
Page 12 GAO-12-549 Small Employer Health Tax Credit
As already discussed, small employers do not commonly offer health
insurance. MEPS estimates that 83 percent of employers who may
otherwise be eligible for the full credit
27
did not offer health insurance in
2010 and that 67 percent of employers who could be eligible for the
partial credit
28
Furthermore, the small employers do not likely view the credit as a big
enough incentive to begin offering health insurance and to make a credit
claim, according to employer representatives, tax preparers, and
insurance brokers we met with. While some small employers could be
eligible for the credit if they began to offer health insurance, small
business group representatives and discussion group participants told us
that the credit may not offset costs enough to justify a new outlay for
health insurance premiums. Related to this concern, the credit being
available for 6 years overall and just 2 consecutive years after 2014
further detracts from any potential incentive to small employers to start
offering health insurance in order to claim the credit.
did not offer insurance. Our discussion groups and other
interviewees confirmed this, with comments and examples of small, low-
wage employers not offering health insurance to employees.
Most discussion group participants and groups we interviewed found the
tax credit to be complicated, deterring small employers from claiming it.
The complexity arises from the various eligibility requirements, the
various data that must be recorded and collected, and number of
worksheets to be completed.
A major complaint we heard centered on gathering information for and
calculating FTEs and the health insurance premiums associated with
those FTEs. Eligible employers reportedly did not have the number of
hours worked for each employee readily available to calculate FTEs and
their associated average annual wages nor did they have the required
health insurance information for each employee readily available.
27
This MEPS statistic is based on employers—both profit and nonprofit—with fewer than
10 employees that pay annual wages of $24,000 or less to over half of their employees.
28
This MEPS statistic is based on employers—both profit and nonprofit—with 10 to 25
employees that pay annual wages of $24,000 or less to over half of their employees.
Because the employers eligible for the partial credit can pay up to $50,000 in wages, this
is a less precise estimate than using MEPS to estimate insurance offerings for the full
credit.
Most Small Employers
Could Not Meet the Health
Insurance Requirement for
the Credit and the Credit
Was Not Seen as an
Incentive to Start Offering
Insurance
Complexity Deterred Small
Employer Claims,
According to Discussion
Groups
Page 13 GAO-12-549 Small Employer Health Tax Credit
Exclusions from the definition of “employee” and other rules make the
calculations complex. For example, seasonal employees are excluded
from FTE counts but insurance premiums paid on their behalf count
toward the employer’s credit. Incorporating the phaseout also complicates
the credit calculation.
In our discussion groups with tax preparers, we heard that small business
owners generally do not want to spend the time or money to gather the
necessary information to calculate the credit, given that the credit will
likely be insubstantial. Tax preparers told us it could take their clients from
2 to 8 hours or possibly longer to gather the necessary information to
calculate the credit and that the tax preparers spent, in general, 3 to 5
hours calculating the credit.
29
Tax preparers we interviewed said that IRS did the best it could with the
Form 8941 given the credit’s complexity. IRS officials said they did not
receive criticism about Form 8941 itself but did hear that the instructions
and its seven worksheets were too long and cumbersome for some
claimants and tax preparers. On its website, IRS tried to reduce the
burden on taxpayers by offering “3 Simple Steps” as a screening tool to
help taxpayers determine whether they might be eligible for the credit.
However, to calculate the actual dollars that can be claimed, the three
steps become 15 calculations, 11 of which are based on seven
worksheets, some of which request multiple columns of information.
Figure 4 aligns IRS’s “3 Simple Steps,” with the seven worksheets in the
instructions for Form 8941 and the lines on Form 8941. (See app. V for
full text for this figure.)
We did hear from a couple of participants—
a small business owner and a nonprofit representative—that they did not
find the credit overly burdensome.
29
The National Society of Accountants conducted a survey in 2008 that estimated the
hourly tax preparer fee to be $122 an hour. Tax preparers may not necessarily charge for
the credit, according to some discussion group participants.
Figure 4: Form 8941 and Credit Calculations on Worksheets Related to IRS’s “3 Simple Steps” for
Determining Potential Eligibility
Interactive graphic
GAO-12-549 Small Employer Health Tax CreditPage 14
Source: GAO analysis of IRS information.
Directions:
To view and print full noninteractive versions of IRS Form 8941 and worksheets included in this graphic, go to appendix V.
Print instructions
Roll over the buttons below to reveal the worksheets necessary to calculate credit totals needed for
lines on IRS Form 8941.
Step 1 Step 2 Step 3
Determine the total number
of employees (FTEs)
Determine the average annual
wages paid to employees
Determine if you pay at least of half
insurance premiums for employees
Additional calculations
(FTE and wage phase out)
Page 15 GAO-12-549 Small Employer Health Tax Credit
Given the effort involved to make a claim and the uncertainty about the
credit amounts, a few discussion group participants said it would be
helpful to be able to quickly estimate employers’ eligibility for the credit
and the amount they might receive; this would help them to decide
whether the credit would be worth the effort, although this would not
reduce the complication of filing out Form 8941 because, to fill out the
form, full documentation would need to be reviewed. IRS’s Taxpayer
Advocate Service
30
is developing a calculator for IRS’s website to quickly
estimate an employer’s eligibility, but this will still require gathering
information such as wages, FTEs, and insurance plans. We also heard
concerns that a calculator could cause confusion for clients who find they
are eligible when quickly estimating the credit but then turn out to be
ineligible or find they are eligible for a smaller credit when their
accountant fills out Form 8941.
Many small businesses reported that they were unaware of the credit.
The NFIB Research Foundation
31
and the Kaiser Family Foundation both
estimated that approximately 50 percent of small businesses were aware
of the credit, as of May 2011, or more than 1 year after Congress
authorized this credit.
32
The extent to which being unaware prevented eligible employers from
claiming the credit for tax year 2010 is not known. Some discussion group
participants raised concerns about unawareness, but they also cited other
factors limiting credit claims for tax year 2010. If 50 percent of small
businesses knew about the credit, then the approximately 170,300 claims
is a relatively small proportion of those that were knowledgeable. This
indicates that other factors contributed to employers not claiming the
credit. Further, it is hard to interpret the impact of awareness on claims
because these surveys included an unknown number of small business
30
The Taxpayer Advocate Service is an independent organization within the IRS that
helps taxpayers who are experiencing economic harm; are seeking help in resolving
problems with IRS; and believe an IRS system or procedure is not working as it should.
31
The NFIB Research Foundation is a nonprofit affiliated with NFIB.
32
NFIB conducted this survey in April and May 2011 of 750 small employers of firms with
50 or fewer employees. The Kaiser Family Foundation conducted its survey from January
through May 2011 of 3,184 public and private firms with 3 or more employees and its
questions about the credit were directed to employers with 50 or fewer employees.
The Extent to Which Lack
of Awareness Is a Factor
Limiting More Claims Is
Unknown, Although IRS
Did Significant Outreach
Page 16 GAO-12-549 Small Employer Health Tax Credit
employers that would not be eligible for the credit regardless of their
awareness. For those employers that were unaware, the surveys did not
account for their accountants or tax preparers that may have known about
the credit but did not tell their clients about it because they did not believe
their clients would qualify or because the credit amount would be very
small. In addition, the surveys did not cover tax-exempt entities.
To raise awareness of the credit, IRS did significant outreach. IRS
developed a communication and outreach plan, written materials on the
credit, a video, and a website. IRS officials also reached out to interest
groups about the credit and developed a list of target audiences and
presentation topics. IRS officials began speaking at events in April 2010
to discuss the credit and attended over 1,500 in-person or web-based
events from April 2010 to February 2012. Discussion of the credit at the
events varied from being a portion of a presentation covering many topics
to some events that focused on the credit with a dedicated discussion
period.
IRS does not know whether its outreach efforts actually increased
awareness of the credit or were otherwise cost-effective. It would be
challenging to estimate the impact of IRS’s outreach efforts on awareness
with a rigorous methodology; however, based on ongoing feedback they
received from interest groups, IRS officials told us they believe their
efforts have been worthwhile. IRS used some feedback from focus
groups of tax preparers and from other sources
33
to revise its outreach
efforts. For example, IRS modified its outreach from initially focusing on
tax preparers and small employers to including insurance brokers in
2012.
Given that most small employers do not offer insurance and what we
heard about the size of the credit not being big enough to incentivize
offering health insurance,
34
33
Each focus group in 2011 consisted of 12 tax preparers. IRS issued a report on the
focus groups’ results on October 14, 2011.
it may not be possible to significantly expand
credit use without changing the credit’s eligibility. Most claims were for
partial credits and many people we spoke with view the credit amount as
34
Given the previously discussed lack of knowledge or awareness, it is not clear that
increasing outreach would increase credit usage.
Addressing Factors and
Expanding Credit Use May
Require Substantive
Design Changes
Page 17 GAO-12-549 Small Employer Health Tax Credit
too small and temporary to justify providing health insurance when none
is provided now. In addition, given that IRS has conducted extensive
outreach about the credit, it is not likely that more outreach would
significantly increase the number of businesses claiming the credit.
Amending the eligibility requirements or increasing the amount of the
credit may allow more businesses to take advantage of the credit,
35
• Increasing the amount of the full credit, the partial credit, or both.
but
these changes would increase its cost to the Federal government.
Options include the following:
• Increasing the amount of the credit for some by eliminating state
premium averages.
• Expanding eligibility requirements by increasing the number of FTEs
and wage limit allowable for employers to claim the partial credit, the
full credit, or both. This expansion would not, however, likely affect the
smallest employers which do not offer health insurance.
• Simplifying the calculation of the credit in the following ways:
• Using the number of employees and wage information already
reported on the employer’s tax return. This could reduce the
amount of data gathering as well as credit calculations because
eligibility would be based on the number of employees and not
FTEs. A trade-off with this option would be less precision in
targeting the full and partial credit amount to specific small
employer subgroups.
36
• Offering a flat credit amount per FTE (or number of employees)
rather than a percentage, which would reduce the precision in
targeting the credit.
35
Three bills were recently introduced to amend the small employer health insurance
credit to increase the maximum number of FTEs to 50, modify the phase out of the credit
amount, and repeal the limitation based on state health insurance premium averages.
H.R. 4324, Small Business Employee Health Insurance Credit Expansion Act of 2012,
also would repeal the 2-year limit after 2014, making the credit available indefinitely.
H.R.4252 and S.2227, both titled Small Business Health Care Tax Credit Improvement Act
of 2012, propose to increase allowable average annual salaries paid to employees to
$28,500 to claim the full credit.
36
Using the number of employees instead of FTEs would require an increase in the
number of eligible employees in order to reach the same population of small employers.
For example, two part-time employees working 20 hours per week count as one FTE,
making the employer appear larger than if FTEs were counted.
Page 18 GAO-12-549 Small Employer Health Tax Credit
The data limitations that made it difficult to estimate the number of
businesses eligible for the current credit also make it difficult to estimate
the impact of any design changes.
IRS’s compliance efforts for the credit incorporate practices that have
been shown effective in helping to ensure compliance with other tax
provisions or are consistent with IRS strategic objectives. Some of those
practices were used for the Telephone Excise Tax Refund (TETR)
37
and
Consolidated Omnibus Budget Reconciliation Act (COBRA) subsidies for
health insurance for the unemployed, according to IRS officials.
38
• Using computerized filters to review credit claims on Forms 8941 for
certain errors or potential problems that may trigger an examination of
the claim.
Specifically, IRS is doing the following:
• Transcribing more lines of data from Form 8941 into IRS computer
systems which should make the filters more effective. Although
transcribing more lines increases processing and data storage costs,
IRS plans to transcribe more lines for tax years 2011 and 2012 claims
to ensure better verification of eligibility.
37
We found that that IRS’s compliance plans for the TETR were consistent with good
management practices in previous reports. See GAO, Tax Administration: Telephone
Excise Tax Refund Requests Are Fewer Than Projected and Have Had Minimal Impact on
IRS Services, GAO-07-695 (Washington, D.C.: Apr. 11, 2007).
38
We tested IRS’s internal controls for the COBRA unemployment subsidies in the
American Recovery and Reinvestment Act and found that IRS was able to identify all five
fictitious companies used to fraudulently apply for the subsidies. See GAO Proactive
Testing of ARRA Tax Credits for COBRA Premium Payments, GAO-10-804R
(Washington, D.C.: June 14, 2010).
IRS Is Implementing
Several Practices
from Prior
Compliance Efforts,
but Additional Steps
Could Be Taken
IRS Incorporated Practices
from Strategic Objectives
and Prior Compliance
Efforts
Page 19 GAO-12-549 Small Employer Health Tax Credit
• Freezing refunds of tax-exempt entities whose returns have been
selected for examination, which avoids the costs of trying to recover
funds.
39
• Considering the documentation burden on claimants. IRS did not
require claimants to submit documentation on health insurance
premiums with their Form 8941 because IRS officials said they will
review examination results and may revisit the decision not to require
documentation if results suggest that such documentation would
improve compliance checks.
• Modifying filters, as needed, in response to observed trends. For
example, a filter that applies to tax-exempt organization claims was
tripped by about a quarter of claimant organizations, as of
December 31, 2011. IRS officials said some eligible tax-exempt
entities tripped the filter because it was too broad. To address this,
IRS modified the filter to more clearly identify qualifying tax-exempt
organizations.
• Completing a risk assessment on compliance issues related to the
credit. The assessment identified risks involving refunds for tax-
exempt entities, difficulties verifying employment tax return
information for certain employers, and not using existing Math Error
Authority (MEA).
• Considering the costs and benefits of MEA for the credit.
40
IRS
officials identified three filters whose type of errors could be
addressed with MEA. They noted that less than 1 percent of Forms
8941 tripped one or more of those filters,
41
39
See GAO, Tax Gap: Complexity and Taxpayer Compliance,
which IRS officials said
GAO-11-747T (Washington,
D.C.: June 28, 2011).
40
The Internal Revenue Code provides IRS with MEA to assess additional tax or
otherwise correct tax return errors in limited circumstances when an adjustment is the
result of mathematical or clerical errors on the return. In these cases, IRS can avoid costly
audits and IRS is not required to provide taxpayers a right to appeal MEA assessments,
although they may file a claim to ask IRS to reduce the assessment if they believe IRS
erred. See 26 U.S.C. § 6213(b). Over the years, Congress has granted MEA for specific
purposes and those purposes are listed in section 6213(g)(2).
41
These three IRS filters are to check whether credit claims are consistent with eligibility
requirements subject to computation criteria.
Page 20 GAO-12-549 Small Employer Health Tax Credit
does not justify the costs to develop procedures to use MEA, if it were
granted.
42
IRS developed 21 filters for Form 8941, some of which apply differently to
SB/SE and TEGE taxpayers. The filters cover some of the eligibility
requirements for the credit. Errors on about 3.5 percent (11,763) of Forms
8941 for tax year 2010 tripped 1 or more filters; almost half of those forms
were from tax-exempt entities. According to IRS officials, the filter failure
rate is consistent with other recent tax credits.
The filters do not cover all of the credit’s requirements for several data-
related reasons.
43
Some Form 8941 filters also face limitations mainly because of problems
with data or IRS’s systems.
In one case, data are not included on Form 8941 but
may be included on worksheets required to be retained by claimants
(e.g., information on business owner family members or seasonal
employees included in credit calculations); in another case, certain data
are not transcribed (e.g., the credit amount for certain claimants). For
other requirements, IRS officials stated that reasonable filters cannot
easily be developed because of challenges with matching data.
• Filters are mutually exclusive, meaning that filters on related
requirements are viewed in isolation. However, according to IRS
officials, IRS has ways to identify whether a form failed more than one
filter, which IRS considers when identifying returns for potential
examination.
• Some filters may mistakenly target eligible claimants because the
filters rely on general thresholds in Form 8941 data or, in some cases,
other IRS data (such as employee-level data) that are not exact
matches to data on the Form 8941.
42
We previously recommended that Congress should consider broadening IRS’s ability to
use MEA, with appropriate safeguards against misuse. See GAO, Recovery Act: IRS
Quickly Implemented Tax Provisions, but Reporting and Enforcement Improvements Are
Needed, GAO-10-349 (Washington, D.C.: Feb. 10, 2010).
43
We do not describe the filters and the eligibility requirements not being covered in detail
because of concerns about revealing IRS’s compliance approach and criteria.
Filters Check Some
Eligibility Criteria, but Are
Limited by Available Data
Page 21 GAO-12-549 Small Employer Health Tax Credit
Data on Forms W-2 (employees’ annual Wage and Tax Statement) could
provide additional data for filters once the provision in PPACA is
implemented that requires employers to report the cost—including both
employer and employee contributions—of certain types of health
insurance provided to an employee.
44
IRS officials said the data have
limited use because, among other things, they would not provide details
for determining whether an employer met the credit’s requirements for
health insurance; therefore, IRS officials will not pursue using the data at
this time. Nevertheless, the data could be used in a filter to identify
claimants who reported no health insurance contributions on Form W-2
and therefore may not be offering health insurance. In the absence of
other documentation or third-party reporting on health insurance, using
Form W-2 data in a filter could be a cost-effective, rough indicator of
whether a claimant is paying employee health insurance premiums,
without increasing taxpayer burden. However, IRS provided transition
relief to employers that file fewer than 250 Forms W-2 per year, and
issued guidance stating that these employers will not be required to report
the data until further guidance is issued. As a result, it is unlikely that the
data could be useful before 2014, the year when the credit will only be
available to employers for any 2 consecutive years.
After the filters are run, IRS creates lists of claims to consider for further
examination. SB/SE wanted enough examination cases to spot check
different filters and claims from different regions, to enable them to
establish a field presence and to learn about compliance risks with the
credit, according to an SB/SE official.
45
Examination staff in SB/SE and
TEGE are to follow a set of instructions when doing examinations.
46
SB/SE’s examination instructions address all of the credit’s requirements
for small businesses to claim the credit except that they do not include
44
See 26 U.S.C. § 6051(a)(14), which generally requires employers to report the
aggregate cost of employer-sponsored coverage they provide for an employee on Form
W-2.
45
TEGE established two mandatory filters that if failed, automatically trigger an exam; only
16 forms tripped these two filters, as of December 31, 2011.
46
Examiner instructions consist of several types of documents, such as worksheets and
checklists on the credit’s eligibility requirements; we also refer to these documents as
examination “guidance.”
Examination Instructions
Cover Most Eligibility
Requirements, but Gaps
Exist
Page 22 GAO-12-549 Small Employer Health Tax Credit
specific instructions for examiners on determining eligibility of claimants
with non-U.S. addresses. An employer located outside of the United
States with a business or trade interest in the United States may claim the
credit only if the employer pays premiums for coverage issued in and
regulated by one of the states or the District of Columbia. Without a
prompt in examination instructions, IRS examiners may overlook
claimants that do not comply with the address requirements. An SB/SE
official said IRS has no instructions for examiners to review claimants with
non-U.S. addresses during an examination on the credit because
potential compliance problems with businesses with non-U.S. addresses
exist for other tax credits. This, however, was not IRS’s approach for
another general business tax issue relevant to the credit—whether
claimants that carry back the credit to offset tax liabilities in previous
years did so properly. Near the end of our work, SB/SE added guidance
to one of its examination instruction documents to cover the carry back
issue.
Instructions for TEGE examiners also address most of the eligibility
requirements to claim the credits, but, like SB/SE’s, TEGE examination
instructions do not address how to review claimants with non-U.S.
addresses.
47
According to IRS officials, the TEGE examiners are trained specifically for
doing examinations on the credit and therefore need less guidance than
SB/SE examiners, who work on multiple issues simultaneously. However,
TEGE examination documents contain detailed guidance in a workbook
Further, TEGE instructions for some of the credit’s
requirements have less detail compared to SB/SE’s instructions. TEGE’s
instructions provide steps on how to determine if an employer’s insurance
premiums paid met “qualifying arrangement” and other criteria, but they
provide less detail than SB/SE instructions. For example, SB/SE
guidance instructs examiners to review health insurance policies and
invoices to confirm premium payments, and to review other
documentation to check whether the employer offers health benefits that
are not eligible for the credit. TEGE instructions do not suggest these
steps and also do not provide a prompt for examiners to ensure that
insurance premiums paid on behalf of seasonal employees are included
in calculations.
47
Tax-exempt entities with non-U.S. addresses must pay health insurance premiums for
an employee’s coverage issued in and regulated in one of the states or the District of
Columbia.
Page 23 GAO-12-549 Small Employer Health Tax Credit
format for these trained examiners on other credit requirements. Without
detailed guidance for TEGE examiners that instructs them on how to
examine health insurance documents, examiners may not consistently
identify noncompliance, which could lead to erroneous credit refunds.
This could particularly be the case as examining health insurance
documents to check eligibility for this new credit has not been typical work
for these examiners.
For tax year 2010, SB/SE plans to conduct over 1,500 examinations
related to the credit, and TEGE anticipates about 1,000 examinations. An
SB/SE official said the number of examinations is expected to provide
initial compliance information and allow IRS to establish a compliance
presence without committing too many resources initially. TEGE selected
its number of examinations based on resource decisions, before tax year
2010 claims began. Neither SB/SE nor TEGE adjusted the number of
examinations once actual claim numbers were known. As a result, the
percentage of TEGE claims being examined is high, according to a TEGE
official. Table 1 summarizes the status of IRS’s examinations on the
credit.
Table 1: Examination Actions for Form 8941 as of February 2012, for Tax Year 2010
Number of: SB/SE
a
TEGE
Total
Examinations initiated 500 570 1,070
Additional examinations anticipated 1,000 430 1,430
Closed examinations 119 88
207
Closed examinations resulting in a change to the credit amount 46 22 68
Sources: SB/SE and TEGE officials.
a
For examinations, SB/SE does not distinguish between examinations on business or individual
claimants.
IRS’s database on examination results tracks the aggregate dollar
amount of tax changes as a result of the examination but does not
contain the reason a change is made. Consequently, IRS is not able to
isolate and analyze examination results related to the credit versus other
tax issues. This is particularly a problem for SB/SE examinations, which
may cover issues other than the credit.
48
48
TEGE examinations will only cover the credit, according to IRS officials.
Instead, as initial examinations
Examinations Under Way,
but IRS Needs to Develop
a Plan for Efficiently
Analyzing Results on
Credit Compliance
Page 24 GAO-12-549 Small Employer Health Tax Credit
have closed, IRS officials said that management has spoken with
examiners about findings related to the credit. This has been possible
because of the relatively low initial volume of cases, but this approach
may not be feasible as results accumulate. Therefore, it is not clear how
IRS can efficiently analyze results to decide whether changes are
necessary in how it examines the credit or how it educates small
employers about how to comply with the credit’s rules, and whether it
committed too many or too few resources to examinations of the credit.
Furthermore, IRS does not have criteria for deciding whether the
resources spent on examinations of the credit are appropriate, given the
amount of errors found. IRS officials said that for future years they plan to
select the number of credit examinations based on past results, identified
compliance risks, and available resources. However, without criteria to
assess the results in concert with these risks and resources, IRS is less
able to ensure that examination resources target errors with the credit,
rather than examining compliant claimants.
For example, early examination results (as of February 2012) show that
67 percent of the examinations completed were closed without changing
the credit amount. Examinations without a change burden taxpayers and
use IRS resources. We recognize that few of the planned examinations
have been completed and the “no change” percentage could change.
According to IRS officials, cases resulting in “no change” tend to be the
first cases closed because they close more quickly than cases requiring a
change. However, IRS is not using change rate information from prior tax
credits to determine if examinations for the credit have a “high” no-change
rate, which could be one indicator to help decide how many examination
resources to apply to the credit. IRS officials said they do not plan to use
data from examinations of other tax provisions to benchmark measures—
such as the no-change rate or length of time an examination is open—
because results would not be comparable.
A summary of examination results specific to the credit could also inform
decisions about using additional compliance tools such as soft notices.
49
49
A soft notice is a letter generated to taxpayers that IRS has identified possible errors on
the taxpayer’s form. The goal is to increase compliance at minimal costs by educating
taxpayers for future compliance without doing an examination and minimizing the
taxpayers’ need to respond to the notice.
In the past, IRS has used soft notices to correct errors and collect funds
Page 25 GAO-12-549 Small Employer Health Tax Credit
without initiating an examination.
50
A senior IRS official who is
implementing the credit said IRS has not ruled out using soft notices, but
examination results would need to identify an issue that would justify their
use. He said soft notices are not effective for all taxpayers or situations.
He said IRS would consider using soft notices if officials found a series of
returns with mistakes from the same tax preparer or promoter of tax
schemes. Furthermore, soft notices may necessitate follow-up, which
would negate some of the advantages of the notices. If IRS analysis
showed that examinations were not a cost-effective way to pursue certain
errors made in claiming a credit, a soft notice may offer another approach
to improving compliance with lower costs to IRS and less burden on
claimants.
There are a variety of research questions that could be of interest to
policymakers about the effects of the credit that cannot be evaluated with
data currently available. Figure 5 shows how the credit may influence
employer behavior and, ultimately, employees.
50
For example, see GAO, Advance Earned Income Tax Credit: Low Use and Small
Dollars Paid Impede IRS’s Efforts to Reduce High Noncompliance, GAO-07-1110
(Washington, D.C.: Aug. 10, 2007), and Tax Gap: IRS Could Do More to Promote
Compliance by Third Parties with Miscellaneous Income Reporting Requirements,
GAO-09-238 (Washington, D.C.: Jan. 28, 2009).
Data to Evaluate
Many Questions about
the Effects of the
Credit Are Not
Available
Page 26 GAO-12-549 Small Employer Health Tax Credit
Figure 5: Model of Potential Outcomes and Influential Factors for the Small Employer Health Insurance Tax Credit
Note: Basic model structure is based on University of Wisconsin Extension Program Development
and Evaluation model, as shown in GAO-12-208G. Content and relationships among variables are
based on GAO analysis of interviews with subject matter specialists, and literature review.
To answer research questions about the credits potential outcomes
shown in figure 5, the following are examples of data that might be
needed:
• number of small, low-wage employers offering health insurance,
before and after the credit was available;
• number of employees at small, low-wage employers, who have or
could obtain health insurance through their employers; and
• amount of annual health insurance premium costs for small, low-wage
employers before and after the credit.
None of these data are readily available or free of limitations, which
complicates an evaluation. For example, the available data on employer-
sponsored health insurance do not align with the credit’s eligibility criteria,
according to our interviews with subject matter specialists and our review
Page 27 GAO-12-549 Small Employer Health Tax Credit
of the data (see app. VI for a summary of the data sources), nor could we
identify a data source that tracks when, and why, employers begin
offering insurance. As a result of the limitations with all three types of
data, it would be difficult to precisely measure changes in health
insurance availability, offering, and costs because of the credit, without
collecting additional data. Isolating influential factors—such as those
shown in figure 5—that may contribute to the effects of the credit would
also be a challenge in an evaluation.
51
IRS officials said they will not collect data on credit claimants, outside of
those collected on Form 8941. IRS’s position on data collection for all
provisions of the tax code is that it only collects data it needs to ensure
compliance with the tax laws.
52
Collecting additional data needed for policy evaluation would have costs,
and the magnitude of those costs would depend on the type and amount
of data needed, which depends on the research questions being asked.
An additional consideration in thinking about the benefits and costs of
additional data collection for policy evaluation purposes is the time limits
on claiming the credit. The current version of the credit runs through the
end of 2014.
53
Policymakers’ conclusions about the questions to be
answered by any evaluations of the credit’s effects would determine the
type of data that would need to be collected.
The Small Employer Health Insurance Tax Credit was intended to offer an
incentive for small, low-wage employers to provide health insurance.
However, utilization of the credit has been lower than expected, with the
available evidence suggesting that the design of the credit is a large part
of the reason why. While the credit could be redesigned, such changes
51
For details on methods for identifying causation, including experiments and quasi-
experiments, using comparison groups, see GAO, Designing Evaluations: 2012 Revision,
GAO-12-208G (Washington, D.C.: January 2012). These designs are not feasible for the
credit because it was implemented simultaneously across the country.
52
See GAO, Government Performance and Accountability: Tax Expenditures Represent a
Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690
(Washington, D.C.: Sept. 23, 2005).
53
Starting in 2014, eligible small employers can claim the credit for the 2 consecutive
years beginning when the employer first offers employee health insurance from a state
exchange.
Conclusions
Page 28 GAO-12-549 Small Employer Health Tax Credit
come with trade-offs. Changing the credit to expand eligibility or make it
more generous would increase the revenue loss to the federal
government.
In administering the credit to ensure compliance, IRS employed a number
of practices that were shown effective for other tax provisions or are
consistent with IRS strategic objectives. Nevertheless, we identified
several opportunities for IRS to either improve compliance or perhaps
reduce the resources it is devoting to ensuring compliance. Without
additional guidance for examiners on employers with non-U.S. addresses,
there is a risk of improper credit claims being allowed. Without more
systematic attention to early examination results, IRS could lock itself into
devoting more scarce resources than needed to examinations.
To help ensure thoroughness and consistency of examinations on the
credit, we recommend that the Commissioner of Internal Revenue take
the following two actions:
1. Revise the SB/SE and TEGE examination instructions to include
instructions for examiners on how to confirm eligibility for the credit for
small employers with non-U.S. addresses.
2. Revise the TEGE examination guidance to include more detailed
instructions for examiners on how to confirm that claimants properly
calculated eligible health insurance premiums paid for purposes of the
credit. The SB/SE examination instructions could serve as a model.
To help ensure that IRS uses its examination resources efficiently, we
recommend that the Commissioner of Internal Revenue take the following
two actions:
3. Document and analyze the results of examinations involving the credit
to identify how much of those results are related to the credit versus
other tax issues being examined, what errors are being made in
claiming the credit, and when the examinations of the credit are worth
the resource investment.
4. Related to the above analysis of examination results on the credit,
identify the types of errors with the credit that could be addressed with
alternative approaches, such as soft notices.
Recommendations for
Executive Action
Page 29 GAO-12-549 Small Employer Health Tax Credit
In an April 30, 2012, letter responding to a draft of this report (which is
reprinted in app. VII), the IRS Deputy Commissioner for Services and
Enforcement provided comments on our findings and recommendations
as well as information on additional agency efforts related to
implementing the Small Employer Health Insurance Tax Credit in PPACA.
IRS generally agreed with all four of our recommendations. Regarding our
recommendation on examination instructions related to small employers
with non-U.S. addresses, IRS stated that SB/SE will provide additional
guidance in its instructions and that TEGE has added guidance to its
instructions. On May 1, 2012, IRS provided a copy of the TEGE
instructions, which we are reviewing. On our recommendation on revising
TEGE’s examination guidance, IRS’s letter said that on April 13, 2012,
TEGE implemented more detailed instructions in its examination
guidance related to confirming proper calculations of eligible health
insurance premiums paid for purposes of the credit. These instructions
were also included in the TEGE document provided on May 1, 2012.
With regard to analyzing credit examination results to identify compliance
issues specific to the credit, IRS said it regularly analyzes audit results to
determine whether resources are expended efficiently, though its
information systems do not currently capture adjustments by issue, such
as this tax credit. IRS agreed to leverage existing information systems
and, as appropriate, to allocate resources to manually analyze
examination results. IRS said this will include, as feasible, identifying the
types and amounts of errors related to the credit. We reiterate the benefit
of documenting and analyzing the results of examinations involving the
credit. If it does not do so, IRS will not have information for determining
whether examinations of the credit are worth the resource investment.
Regarding our fourth recommendation on using examination results to
determine whether alternative compliance approaches, such as soft
notices, could help address errors with the credit, IRS agreed to continue
to review its compliance efforts to determine whether soft notices would
be appropriate.
As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the Chairmen and
Ranking Members of other Senate and House committees and
subcommittees that have appropriation, authorization, and oversight
responsibilities for IRS. We will also send copies to the Commissioner of
Internal Revenue, the Secretary of the Treasury, the Chairman of the IRS
Agency Comments
and Our Evaluation
Page 30 GAO-12-549 Small Employer Health Tax Credit
Oversight Board, and the Director of the Office of Management and
Budget. In addition, the report will be available at no charge on the GAO
website at http://www.gao.gov.
If you or your staff have any questions or about this report, please contact
me at (202) 512-9110 or at [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to this
report are listed in appendix VIII.
James R. White
Director, Tax Issues
Strategic Issues
Appendix I: Scope and Methodology
Page 31 GAO-12-549 Small Employer Health Tax Credit
To assess the extent to which the Small Employer Health Insurance Tax
Credit (referred to in this report as the credit) is being claimed, we
obtained and analyzed Internal Revenue Service (IRS) data on the claims
on Form 8941 for tax year 2010. We interviewed responsible IRS staff
and examined background materials. IRS provided a report from the
Form 8941 data and we reviewed the programming code that created that
report. We corroborated the results of this IRS report with a Treasury
Inspector General for Tax Administration (TIGTA) report published in
November and found similarities.
1
To identify any factors limiting credit claims, we interviewed groups
representing employers, tax preparers and insurance brokers and to
assess how these factors could be addressed, we analyzed our interview
results as well as relevant documents. Specifically, we spoke with
representatives of the National Federation of Independent Businesses,
the National Council of Nonprofits, the Small Business Majority, the U.S.
Chamber of Commerce, the American Institute of Certified Public
Accountants, America’s Health Insurance Plans, the National Society of
Accountants, the National Association of Enrolled Agents, and the
National Association of Health Underwriters. We worked with some of
these groups to assemble discussion groups with tax preparers, health
insurance brokers, and employers to discuss potential factors and ways
to address them. Discussion groups were, for the most part, telephone
conferences. We also spoke with insurance and tax preparation
companies, specifically, BlueCross Blue Shield of Kansas City,
Independent Health of New York, H&R Block’s Tax Institute, and Jackson
Hewitt Tax Service. We used qualitative analysis software to do a content
analysis of the interviews and discussion group comments.
The data were found to be sufficiently
reliable for our purposes. We identified estimates of employers that were
potentially eligible to claim the credit by reviewing reports and websites of
government agencies, think tanks, and interest groups. When possible,
we interviewed officials from the government agencies and business
groups that developed estimates.
To provide additional support for discussion group and interview findings
we reviewed documents and, where possible, we identified data from
IRS, the 2010 Medical Expenditure Panel Survey, or the 2011 Kaiser
1
TIGTA, Affordable Care Act: Efforts to Implement the Small Business Health Care Tax
Credit Were Mostly Successful, but Some Improvements Are Needed, 2011-40-103
(Washington, D.C.: Sept. 19, 2011).
Appendix I: Scope and Methodology
Appendix I: Scope and Methodology
Page 32 GAO-12-549 Small Employer Health Tax Credit
Family Foundation Health Benefits Survey. At IRS, we interviewed
officials from the Small Business/Self-Employed Division (SB/SE),
including officials in the Communications and Liaison Office; the Tax
Exempt and Government Entities Division (TEGE); the Research and
Analysis for Tax Administration division, and the Taxpayer Advocacy
Service.
To assess how fully IRS is ensuring that the tax credit is correctly claimed
by eligible employers, we reviewed IRS’s compliance plan and filters and
instructions for IRS staff conducting examinations, and compared these
documents with compliance practices used for prior tax provisions and
found in IRS strategic objectives.
2
To assess what would be needed to evaluate the effects of credit, we
conducted a literature review and interviewed representatives of the
forenamed groups and subject matter specialists from government,
academia, research foundations and think tanks. We selected the
specialists based primarily on our literature review and spoke with
individuals at the University of Massachusetts, Boston; Massachusetts
Institute of Technology; the Commonwealth Fund; the Urban Institute; the
Kaiser Family Foundation; the American Enterprise Institute; the
Employee Benefit Research Institute; the RAND Corporation; the Small
Business Administration Office of Advocacy; and the Office of Tax Policy
at the Department of the Treasury. We reviewed available data in
commonly cited surveys with questions on employer health insurance,
and identified how the questions and variables match to the eligibility
criteria for the credit.
We also highlighted any gaps between
filters and examination instructions and the credit’s eligibility rules. We
reviewed the filter results for tax year 2010 claims and interviewed SB/SE
and TEGE officials about compliance efforts.
We conducted this performance audit from July 2011 through May 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
2
For example, see GAO, Tax Refunds: Enhanced Prerefund Compliance Checks Could
Yield Significant Benefits, GAO-11-691T (Washington, D.C.: May 25, 2011).
Appendix I: Scope and Methodology
Page 33 GAO-12-549 Small Employer Health Tax Credit
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Appendix II: State Average Premiums for Small
Group Markets for 2010 and 2011
Page 34 GAO-12-549 Small Employer Health Tax Credit
The Small Employer Health Insurance Tax Credit is based on a
percentage of the lesser of (1) the premiums paid by the eligible small
employer for employees during the taxable year and (2) the amount of
premiums the employer would have paid if each employee were enrolled
in a plan with a premium equal to the average premium for the small
group market in the state (or in an area in the state) in which the
employer is offering health insurance. The Secretary of Health and
Human Services determines whether separate average premiums will
apply for areas within a state and also determines the average premium
for a state or substate area. Table 2 shows the average premiums for the
small group market in each state for tax years 2010 and 2011.
Table 2: State Average Premiums for Small Group Markets for 2010 and 2011
2010 2011
Employee only
(single plan) Family plan
Employee only
(single plan) Family plan
Alabama $4,441 $11,275 $4,778 $12,084
Alaska 6,204 13,723 6,729 14,701
Arizona 4,495 10,239 4,614 11,063
Arkansas 4,329 9,677 4,378 9,849
California 4,628 10,957 4,790 11,493
Colorado 4,972 11,437 5,007 12,258
Connecticut 5,419 13,484 5,640 14,096
Delaware 5,602 12,513 5,902 13,411
District of Columbia 5,355 12,823 5,721 14,024
Florida 5,161 12,453 5,218 12,550
Georgia 4,612 10,598 5,085 11,440
Hawaii 4,228 10,508 4,622 11,529
Idaho 4,215 9,365 4,379 10,066
Illinois 5,198 12,309 5,565 13,176
Indiana 4,775 11,222 5,262 12,097
Iowa 4,652 10,503 4,694 11,051
Kansas 4,603 11,462 4,693 11,909
Kentucky 4,287 10,434 4,456 10,560
Louisiana 4,829 11,074 5,143 11,911
Maine 5,215 11,887 5,261 12,255
Maryland 4,837 11,939 5,073 12,530
Massachusetts 5,700 14,138 5,900 15,262
Michigan 5,098 12,364 5,195 12,539
Appendix II: State Average Premiums for
Small Group Markets for 2010 and 2011
Appendix II: State Average Premiums for Small
Group Markets for 2010 and 2011
Page 35 GAO-12-549 Small Employer Health Tax Credit
2010 2011
Employee only
(single plan)
Family plan
Employee only
(single plan)
Family plan
Minnesota 4,704 11,938 5,048 12,790
Mississippi 4,533 10,501 4,787 10,860
Missouri 4,663 10,681 4,843 11,379
Montana 4,772 10,212 4,923 10,789
Nebraska 4,715 11,169 5,130 12,057
Nevada 4,553 10,297 4,781 10,836
New Hampshire 5,519 13,624 5,858 14,523
New Jersey 5,607 13,521 5,868 14,093
New Mexico 4,754 11,404 5,146 12,328
New York 5,442 12,867 5,589 13,631
North Carolina 4,920 11,583 5,136 11,949
North Dakota 4,469 10,506 4,545 11,328
Ohio 4,667 11,293 4,706 11,627
Oklahoma 4,838 11,002 4,922 11,200
Oregon 4,681 10,890 4,881 11,536
Pennsylvania 5,039 12,471 5,186 12,671
Rhode Island 5,887 13,786 5,956 14,553
South Carolina 4,899 11,780 5,036 11,780
South Dakota 4,497 11,483 4,733 11,589
Tennessee 4,611 10,369 4,744 11,035
Texas 5,140 11,972 5,172 12,432
Utah 4,238 10,935 4,532 11,346
Vermont 5,244 11,748 5,426 12,505
Virginia 4,890 11,338 5,060 12,213
Washington 4,543 10,725 4,776 11,151
West Virginia 4,986 11,611 5,356 12,724
Wisconsin 5,222 12,819 5,284 13,911
Wyoming 5,266 12,163 5,430 12,867
Source: Department of Health and Human Services and IRS information.
Appendix III: Adjustments in Counting Total
Small Employer Claims and Total Credit
Amount Claims for Tax Year 2010
Page 36 GAO-12-549 Small Employer Health Tax Credit
Internal Revenue Service (IRS) data for tax year 2010 show 335,600 total
claims filed. This total must be adjusted to avoid counting the 110,800 S
corporation and partnership claims that were passed through to 165,300
respective shareholders and partners who then filed their claims
separately. Excluding the 165,300 shareholder and partner claims filed
leaves 170,300 small employer claims filed. To capture the number of
credit amounts claimed and avoid the amounts that were claimed by the
S corporations and partnerships as well as their respective shareholders
and partners, we excluded the 110,800 S corporation and partnership
claims to arrive at 224,800 credit amounts claimed. (See fig. 6.)
Figure 6: Number of Credit Claims by Taxpayer Type, Tax Year 2010
Note: Numbers rounded to the nearest hundred.
a
Also included in this group are single member owners of disregarded limited liability corporations.
Appendix III: Adjustments in Counting Total
Small Employer Claims and Total Credit
Amount Claims for Tax Year 2010
Appendix IV: Credit Claims by Employer Size
and Wages Paid, Tax Year 2010
Page 37 GAO-12-549 Small Employer Health Tax Credit
Appendix IV: Credit Claims by Employer Size
and Wages Paid, Tax Year 2010
Appendix V: Form 8941 and Worksheets for
Claiming the Small Employer Health Insurance
Tax Credit
Page 38 GAO-12-549 Small Employer Health Tax Credit
This appendix contains the noninteractive Form 8941 and worksheets,
shown in figure 4 in the letter.
Appendix V: Form 8941 and Worksheets for
Claiming the Small Employer Health
Insurance Tax Credit
Appendix V: Form 8941 and Worksheets for
Claiming the Small Employer Health Insurance
Tax Credit
Page 39 GAO-12-549 Small Employer Health Tax Credit
Appendix V: Form 8941 and Worksheets for
Claiming the Small Employer Health Insurance
Tax Credit
Page 40 GAO-12-549 Small Employer Health Tax Credit
Appendix VI: Publically Available Data on
Small Employer Health Insurance
Page 41 GAO-12-549 Small Employer Health Tax Credit
Through our literature review and interviews, we identified several
commonly cited non-Internal Revenue Service data sources on employer
health insurance. Each source has different variables related to the key
eligibility requirements for the Small Employer Health Insurance Tax
Credit. Table 3 summarizes each source, its basic methodology, and
whether its data matches with these requirements for the credit. The table
only considers data that are readily accessible in public-use data sets.
Table 3: Publically Available Data on Small Employer Health Insurance
Employer Health Benefits Survey
Medical Expenditure Panel
Survey (Insurance Component)
National Compensation
Survey
Sources and methodology
Organizations responsible for
the survey
Kaiser Family Foundation and
Health Research and Educational
Trust
Department of Health and Human
Services, Agency for Healthcare
Research and Quality
Bureau of Labor Statistics
Frequency and contact
method
Annual, conducted by phone Annual, generally conducted by
phone or mail
Annual, conducted by
personal visits, mail,
telephone, and e-mail
Unit of analysis, sample size
and source
Employers—2,088 from Dun and
Bradstreet and the Census of
Governments
Employers
a
Employers;—38,409 private sector
establishments from U.S. Census
Bureau’s Business Register
b
Response rate and most
recent data, as of April 2012
15,566
private industry
establishments from state
unemployment insurance
reports
Forth-seven percent in 2011 Eighty-three percent for private
establishments in 2010
Fifty-six percent for private
industry in 2011
Key eligibility requirement for the credit, and whether the source contains data
Employer is a for-profit or tax-
exempt entity
Yes Yes Yes
Employer offers health
insurance and pays at least
50 percent of premiums
c
Yes Yes Yes
Employer has fewer than 25
full-time equivalents (FTE)
No—number of employees No—number of employees No—number of
employees, from 1 to 49,
and number of full- and
part-time employees
Average annual wages are
less than $50,000 per FTE
No—percentage of full-time
employees who make $23,000 or
less per year
No—percentage of employees who
earned wages in one of three
categories
No—wages are presented
in five percentiles
d
Source: GAO analysis of data sources.
e
a
The Medical Expenditure Panel Survey’s Insurance Component sample is drawn at the
establishment level; an establishment is a particular workplace or location.
b
The National Compensation Survey sample is drawn at the establishment level; an establishment is
a single economic unit that engages in one, or primarily one, type of economic activity. It is usually a
single physical location.
c
Appendix VI: Publically Available Data on
Small Employer Health Insurance
Statistical models used by the National Compensation Survey are able to control for profit/non-profit
status.
Appendix VI: Publically Available Data on
Small Employer Health Insurance
Page 42 GAO-12-549 Small Employer Health Tax Credit
d
The annual wage categories are about (1) $23,920 or less, (2)$23,920 to $54,080, and (3) $54,080
or more.
e
Wage data are presented in percentile categories in the published data. The annual wage
categories, for private industry workers, are about: (1) 10th percentile makes $17,160 or less, (2) 25th
percentile makes $22,235 or less, (3) 50th percentile makes $33,009 or less, (4) 75th percentile
makes $51,605 or less, and (5) the 90th percentile makes $78,811 or less.
Appendix VII: Comments from the Internal
Revenue Service
Page 43 GAO-12-549 Small Employer Health Tax Credit
Appendix VII: Comments from the Internal
Revenue Service
Appendix VII: Comments from the Internal
Revenue Service
Page 44 GAO-12-549 Small Employer Health Tax Credit
Appendix VII: Comments from the Internal
Revenue Service
Page 45 GAO-12-549 Small Employer Health Tax Credit
Appendix VIII: GAO Contact and Staff
Acknowledgments
Page 46 GAO-12-549 Small Employer Health Tax Credit
In addition to the contact named above, Thomas Short, Assistant
Director; Susan Baker; Amy Bowser; Ellen Grady; George Guttman;
Donna Miller, Ruben Montes de Oca, Edward Nannenhorn; Robert
Gebhart; Crystal Robinson; Cynthia Saunders; and Lindsay Swenson
made key contributions to this report.
Appendix VIII: GAO Contact and Staff
Acknowledgments
GAO Contact
Staff
Acknowledgments
(450922)
The Government Accountability Office, the audit, evaluation, and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding decisions.
GAO’s commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO’s website (www.gao.gov). Each weekday afternoon,
GAO posts on its website newly released reports, testimony, and
correspondence. To have GAO e-mail you a list of newly posted products,
go to www.gao.gov and select “E-mail Updates.”
The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO’s website,
http://www.gao.gov/ordering.htm.
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional information.
Connect with GAO on Facebook, Flickr, Twitter, and YouTube.
Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts .
Visit GAO on the web at www.gao.gov.
Contact:
Website: www.gao.gov/fraudnet/fraudnet.htm
E-mail: f[email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470
Katherine Siggerud, Managing Director, [email protected], (202) 512-
4400, U.S. Government Accountability Office, 441 G Street NW, Room
7125, Washington, DC 20548
Chuck Young, Managing Director, y[email protected], (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, DC 20548
GAO’s Mission
Obtaining Copies of
GAO Reports and
Testimony
Order by Phone
Connect with GAO
To Report Fraud,
Waste, and Abuse in
Federal Programs
Congressional
Relations
Public Affairs
Please Print on Recycled Paper.
