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Health Care Tax Credit a Major Pain for Small Businesses

General Business News

August 2012

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Health Care Tax Credit a Major Pain for Small Businesses

Critics say a tax break designed to help small businesses pay for employee health coverage is too confusing and may be too small to attract many claims.

According to a report released last month by the Government Accountability Office, only a fraction of eligible companies had filed for the Small Employer Health Tax Credit, a provision of the Affordable Care Act, also known as Obamacare.

To qualify for the credit, companies must have 25 or fewer workers, pay average salaries of $50,000 or less and cover at least half of their employees’ health insurance premiums.

Gathering, processing and reporting the information needed to establish eligibility has proven to be a major headache, not only for businesses seeking the credit but also for their accountants.

Tax preparers interviewed by the GAO said it could take as long as eight hours simply to collect the necessary data and another three to five hours to run the numbers.

Many of the finance professionals responding to the GAO study said they were confused and frustrated by the complicated formula for calculating the number of full-time equivalent employees, or FTEs, and their associated health care costs. In one step of the process, for example, seasonal workers are excluded from the FTE total, but their health care premiums are still applied to the employer’s credit.

In addition, as the GAO report notes, companies filing for the credit are penalized if they pay more than the average premium for their state. For example, the Department of Health and Human Services has determined that the average health insurance payout for the state of Alabama is $4,441; therefore, that is the most that an employer can claim against the credit even if that particular company pays higher premiums to provide better coverage.

As the incentive is currently structured, companies could also lose some federal assistance if they choose to insure additional employees.

Overall, determining eligibility for the tax credit requires 15 separate calculations, including 11 that involve seven different worksheets.

One tax professional reported to the GAO that “(Small business owners) are trying to run their businesses and operate and make a profit, and when you tell them that they need to take two, three, or four hours just to gather this information, some shake their heads and say ‘No, I’m not going to do it.’ ”

Considering the arduous filing procedure, the GAO concludes that the tax credit is “not large enough to incentivize employers to begin offering insurance.”

In 2010, the year covered by the GAO report, the average tax credit awarded through the initiative was just $2,700.

Based on GAO estimates and other sources, between 1.4 million and 4 million small businesses were eligible to apply for the credit in 2010 but only 170,300 claims were filed. And as the GAO report notes, less than one in five companies applying for the credit – 17 percent – were eligible to claim the full credit amount.

Because the program has been so underutilized, an estimated $20 billion earmarked for the tax credit has gone unclaimed.

Republicans have been quick to seize on the apparent failure of the Small Employer Health Tax Credit in their continuing campaign against the entire Affordable Health Care Act, which was enacted in 2010 and recently upheld in a controversial split decision by the U.S. Supreme Court.

But even some Democrats, including the president, have said the incentive needs to be simplified and expanded.

The GAO suggests that the IRS should simplify the filing process and work more closely with small businesses that want to claim the credit, including taking a “soft” approach to companies that submit incorrect or incomplete paperwork. But the agency stops short of recommending more money be made available. “Changing the credit to expand eligibility or make it more generous would increase the revenue loss to the federal government,” states the report.

Responding to the GAO report, the IRS has agreed to review both its filing and review procedures and to increase its outreach to small businesses that might be eligible to receive assistance through the program.

It seems likely that any substantive changes to the Small Employer Health Tax Credit will have to wait until after the November elections. If the program is revived next year, small businesses should consult with a trusted financial adviser to conduct a full cost/benefit analysis before applying.

Human resources are typically an organization’s biggest expense, and potentially its greatest asset. Providing cost-effective health care coverage could help small businesses recruit and retain highly skilled and motivated employees, leading to greater productivity and profitability.

Unfortunately, it remains unclear whether the Small Employer Health Tax Credit will be a boon or a boondoggle.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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