oversight

Small Employer Health Tax Credit: Factors Contributing to Low Use and Complexity

Published by the Government Accountability Office on 2012-05-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Requesters




May 2012
             SMALL EMPLOYER
             HEALTH TAX
             CREDIT
             Factors Contributing
             to Low Use and
             Complexity




GAO-12-549
                                              May 2012

                                              SMALL EMPLOYER HEALTH TAX CREDIT
                                              Factors Contributing to Low Use and Complexity

Highlights of GAO-12-549, a report to
congressional requesters




Why GAO Did This Study                        What GAO Found
Many small employers do not offer             Fewer small employers claimed the Small Employer Health Insurance Tax Credit
health insurance. The Small Employer          in tax year 2010 than were estimated to be eligible. While 170,300 small
Health Insurance Tax Credit was               employers claimed it, estimates of the eligible pool by government agencies and
established to help eligible small            small business advocacy groups ranged from 1.4 million to 4 million. The cost of
employers—businesses or tax-exempt            credits claimed was $468 million. Most claims were limited to partial rather than
entities—provide health insurance for         full percentage credits (35 percent for small businesses) because of the average
employees. The base of the credit is          wage or full-time equivalent (FTE) requirements. As shown in the figure, 28,100
premiums paid or the average                  employers claimed the full credit percentage. In addition, 30 percent of claims
premium for an employer’s state if
                                              had the base premium limited by the state premium average.
premiums paid were higher. In 2010,
for small businesses, the credit was 35       Number of Small Employers Claiming the Full and Partial Credit Percentages, by FTE and
percent of the base unless the                Wage Requirements for the Credit, Tax Year 2010
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
                                              Notes: This information is based on the approximately 170,300 small employer claims. Numbers are
data are needed to evaluate the effects       rounded to the nearest hundred. Numbers don’t add up because of rounding.
of the credit.
                                              One factor limiting the credit’s use is that most very small employers, 83 percent
GAO compared IRS data on credit               by one estimate, do not offer health insurance. According to employer
claims with estimates of eligible             representatives, tax preparers, and insurance brokers that GAO met with, the
employers, interviewed various credit
                                              credit was not large enough to incentivize employers to begin offering insurance.
stakeholders and IRS officials as well
                                              Complex rules on FTEs and average wages also limited use. In addition, tax
as academicians on evaluation,
compared IRS credit compliance
                                              preparer groups GAO met with generally said the time needed to calculate the
documents with the rules and practices        credit deterred claims. Options to address these factors, such as expanded
used for prior tax provisions and IRS         eligibility requirements, have trade-offs, including less precise targeting of
strategic objectives, and reviewed            employers and higher costs to the Federal government.
literature and data.                          The Internal Revenue Service (IRS) incorporated practices used successfully for
                                              prior tax provisions and from IRS strategic objectives into its compliance efforts
What GAO Recommends
                                              for the credit. However, the instructions provided to its examiners (1) do not
GAO recommends that IRS                       address the credit’s eligibility requirements for employers with non-U.S.
(1) improve instructions to examiners         addresses and (2) have less detail for reviewing the eligibility of tax-exempt
working on cases on the credit and            entities’ health insurance plans compared to those for reviewing small business
(2) analyze results from examinations         plans. These omissions may cause examiners to overlook or inconsistently treat
of credit claimants and use those             possible noncompliance. Further, IRS does not systematically analyze
results to identify and address any           examination results to understand the types of errors and whether examinations
errors through alternative approaches.        are the best way to correct each type. As a result, IRS is less able to ensure that
IRS agreed with GAO’s                         resources target errors with the credit rather than compliant claimants.
recommendations.
                                              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
View GAO-12-549. For more information,
contact James R. White at (202) 512-9110 or   information to convert data on number of employees to FTEs. Additional data
whitej@gao.gov.                               that would need to be collected depend on the questions policymakers would
                                              want answered and the costs of collecting such data.
                                                                                             United States Government Accountability Office
Contents


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




               Page i                              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 ii                             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


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Page iii                                      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 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.

                                   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). 2 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




                                   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.
                                   2
                                    Pub. L. No. 111-148, §§ 1421, 10105, 124 Stat. 119 (Mar. 23, 2010), (codified at 26
                                   U.S.C. § 45R).




                                   Page 1                                       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 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.

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



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 2                                      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.)



Background
Small Employer Health   Small employers with low-wage employees do not commonly offer health
Insurance Market        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.




                        Page 3                                            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 across large
    numbers of employees. As a result, plans offered to small employers




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, 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 4                                        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 Implementation and     IRS’s Small Business and Self-Employed Division (SB/SE) and Tax
Requirements for           Exempt and Government Entities Division (TEGE) are primarily
Calculating and Claiming   responsible for implementing the credit. IRS works with the Department of
                           Health and Human Services (HHS) and the Small Business
the Credit                 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.




                           Page 5                                        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.

Limits on the Credit Amount   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.




                              Page 6                                         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 7                                          GAO-12-549 Small Employer Health Tax Credit
                                  combined phaseout for the credit percentages and removing the state
                                  market limits.

Process for Claiming the Credit   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 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.

                                  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. 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).




                                  Page 8                                         GAO-12-549 Small Employer Health Tax Credit
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     Fewer small employers claimed the credit for tax year 2010 than were
Much Lower Than Initial       thought to be eligible based on rough estimates of eligible employers
Rough Eligibility Estimates   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 (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.

                              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




                              21
                                The number of employees who had their premiums paid by employers that claimed the
                              credit was about 770,000.




                              Page 9                                    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 Small Employer       Most of the claims were for less than the full credit percentage. Of the
Claims Were Reduced       approximately 170,300 small employers making claims for tax year 2010,
Because of the Phaseout   142,200—83 percent—could not use the full credit percentage. Usually
                          employers could not meet the average wage requirement to claim the full
Rules and Some Were       percentage, as about 68 percent did not qualify based on wages but did
Reduced by the State      meet the FTE requirement. (See fig. 3.) 25
Average Premiums




                          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.




                          Page 10                                       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 11                                          GAO-12-549 Small Employer Health Tax Credit
Most Small Employers          As already discussed, small employers do not commonly offer health
Could Not Meet the Health     insurance. MEPS estimates that 83 percent of employers who may
Insurance Requirement for     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
the Credit and the Credit     partial credit 28 did not offer insurance. Our discussion groups and other
Was Not Seen as an            interviewees confirmed this, with comments and examples of small, low-
Incentive to Start Offering   wage employers not offering health insurance to employees.
Insurance
                              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.


Complexity Deterred Small     Most discussion group participants and groups we interviewed found the
Employer Claims,              tax credit to be complicated, deterring small employers from claiming it.
According to Discussion       The complexity arises from the various eligibility requirements, the
                              various data that must be recorded and collected, and number of
Groups                        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.




                              Page 12                                       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 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.

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.)




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.




Page 13                                      GAO-12-549 Small Employer Health Tax Credit
                          Figure 4: Form 8941 and Credit Calculations on Worksheets Related to IRS’s “3 Simple Steps” for
 Interactive graphic
                          Determining Potential Eligibility


                          Directions:
                          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       Determine the average annual            Determine if you pay at least of half           Additional calculations
     of employees (FTEs)             wages paid to employees               insurance premiums for employees              (FTE and wage phase out)




                          Source: GAO analysis of IRS information.



     Print instructions   To view and print full noninteractive versions of IRS Form 8941 and worksheets included in this graphic, go to appendix V.


                                       Page 14                                                        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.


The Extent to Which Lack   Many small businesses reported that they were unaware of the credit.
of Awareness Is a Factor   The NFIB Research Foundation 31 and the Kaiser Family Foundation both
Limiting More Claims Is    estimated that approximately 50 percent of small businesses were aware
                           of the credit, as of May 2011, or more than 1 year after Congress
Unknown, Although IRS      authorized this credit. 32
Did Significant Outreach
                           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.




                           Page 15                                      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.


Addressing Factors and     Given that most small employers do not offer insurance and what we
Expanding Credit Use May   heard about the size of the credit not being big enough to incentivize
Require Substantive        offering health insurance, 34 it may not be possible to significantly expand
                           credit use without changing the credit’s eligibility. Most claims were for
Design Changes
                           partial credits and many people we spoke with view the credit amount as



                           33
                             Each focus group in 2011 consisted of 12 tax preparers. IRS issued a report on the
                           focus groups’ results on October 14, 2011.
                           34
                             Given the previously discussed lack of knowledge or awareness, it is not clear that
                           increasing outreach would increase credit usage.




                           Page 16                                       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 but
these changes would increase its cost to the Federal government.
Options include the following:

•    Increasing the amount of the full credit, the partial credit, or both.
•    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 17                                     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 Is Implementing
Several Practices
from Prior
Compliance Efforts,
but Additional Steps
Could Be Taken
IRS Incorporated Practices   IRS’s compliance efforts for the credit incorporate practices that have
from Strategic Objectives    been shown effective in helping to ensure compliance with other tax
and Prior Compliance         provisions or are consistent with IRS strategic objectives. Some of those
                             practices were used for the Telephone Excise Tax Refund (TETR) 37 and
Efforts
                             Consolidated Omnibus Budget Reconciliation Act (COBRA) subsidies for
                             health insurance for the unemployed, according to IRS officials. 38
                             Specifically, IRS is doing the following:

                             •    Using computerized filters to review credit claims on Forms 8941 for
                                  certain errors or potential problems that may trigger an examination of
                                  the claim.

                             •    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).




                             Page 18                                     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 which IRS officials said




39
 See GAO, Tax Gap: Complexity and Taxpayer Compliance, 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 19                                        GAO-12-549 Small Employer Health Tax Credit
                                     does not justify the costs to develop procedures to use MEA, if it were
                                     granted. 42


Filters Check Some              IRS developed 21 filters for Form 8941, some of which apply differently to
Eligibility Criteria, but Are   SB/SE and TEGE taxpayers. The filters cover some of the eligibility
Limited by Available Data       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 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.

                                Some Form 8941 filters also face limitations mainly because of problems
                                with data or IRS’s systems.

                                •    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.




                                Page 20                                        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.


Examination Instructions   After the filters are run, IRS creates lists of claims to consider for further
Cover Most Eligibility     examination. SB/SE wanted enough examination cases to spot check
Requirements, but Gaps     different filters and claims from different regions, to enable them to
                           establish a field presence and to learn about compliance risks with the
Exist                      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.”




                           Page 21                                       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 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.

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


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 22                                     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.


Examinations Under Way,                    For tax year 2010, SB/SE plans to conduct over 1,500 examinations
but IRS Needs to Develop                   related to the credit, and TEGE anticipates about 1,000 examinations. An
a Plan for Efficiently                     SB/SE official said the number of examinations is expected to provide
                                           initial compliance information and allow IRS to establish a compliance
Analyzing Results on                       presence without committing too many resources initially. TEGE selected
Credit Compliance                          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
                                                                                        a
Number of:                                                                       SB/SE                      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 Instead, as initial examinations


                                           48
                                               TEGE examinations will only cover the credit, according to IRS officials.




                                           Page 23                                          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
In the past, IRS has used soft notices to correct errors and collect funds


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.




Page 24                                        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
Data to Evaluate       policymakers about the effects of the credit that cannot be evaluated with
Many Questions about   data currently available. Figure 5 shows how the credit may influence
                       employer behavior and, ultimately, employees.
the Effects of the
Credit Are Not
Available




                       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).




                       Page 25                                   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 26                                         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
Conclusions   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.




              Page 27                                      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
Recommendations for   credit, we recommend that the Commissioner of Internal Revenue take
Executive Action      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.




                      Page 28                                GAO-12-549 Small Employer Health Tax Credit
                     In an April 30, 2012, letter responding to a draft of this report (which is
Agency Comments      reprinted in app. VII), the IRS Deputy Commissioner for Services and
and Our Evaluation   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


                     Page 29                                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 whitej@gao.gov. 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




Page 30                               GAO-12-549 Small Employer Health Tax Credit
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             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 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 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.

             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).




             Page 31                                     GAO-12-549 Small Employer Health Tax Credit
Appendix I: Scope and Methodology




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 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.

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 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).




Page 32                                 GAO-12-549 Small Employer Health Tax Credit
Appendix I: Scope and Methodology




the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 33                             GAO-12-549 Small Employer Health Tax Credit
Appendix II: State Average Premiums for
                                        Appendix II: State Average Premiums for Small
                                        Group Markets for 2010 and 2011



Small Group Markets for 2010 and 2011

                                        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                                            Employee only
                                     (single plan)             Family plan                    (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




                                        Page 34                                         GAO-12-549 Small Employer Health Tax Credit
                      Appendix II: State Average Premiums for Small
                      Group Markets for 2010 and 2011




                             2010                                                                       2011
                 Employee only                                                               Employee only
                   (single plan)                      Family plan                              (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.




                      Page 35                                                        GAO-12-549 Small Employer Health Tax Credit
Appendix III: Adjustments in Counting Total
                                        Appendix III: Adjustments in Counting Total
                                        Small Employer Claims and Total Credit
                                        Amount Claims for Tax Year 2010


Small Employer Claims and Total Credit
Amount Claims for Tax Year 2010
                                        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.




                                        Page 36                                            GAO-12-549 Small Employer Health Tax Credit
Appendix IV: Credit Claims by Employer Size
              Appendix IV: Credit Claims by Employer Size
              and Wages Paid, Tax Year 2010



and Wages Paid, Tax Year 2010




              Page 37                                       GAO-12-549 Small Employer Health Tax Credit
Appendix V: Form 8941 and Worksheets for
              Appendix V: Form 8941 and Worksheets for
              Claiming the Small Employer Health Insurance
              Tax Credit


Claiming the Small Employer Health
Insurance Tax Credit
              This appendix contains the noninteractive Form 8941 and worksheets,
              shown in figure 4 in the letter.




              Page 38                                        GAO-12-549 Small Employer Health 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
                                            Appendix VI: Publically Available Data on
                                            Small Employer Health Insurance



Small Employer Health Insurance

                                            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

                                                                                Medical Expenditure Panel            National Compensation
                                Employer Health Benefits Survey                 Survey (Insurance Component)         Survey
Sources and methodology
Organizations responsible for Kaiser Family Foundation and                      Department of Health and Human       Bureau of Labor Statistics
the survey                    Health Research and Educational                   Services, Agency for Healthcare
                              Trust                                             Research and Quality
Frequency and contact           Annual, conducted by phone                      Annual, generally conducted by       Annual, conducted by
method                                                                          phone or mail                        personal visits, mail,
                                                                                                                     telephone, and e-mail
                                                                                           a                                      b
Unit of analysis, sample size   Employers—2,088 from Dun and                    Employers —38,409 private sector     Employers; 15,566
and source                      Bradstreet and the Census of                    establishments from U.S. Census      private industry
                                Governments                                     Bureau’s Business Register           establishments from state
                                                                                                                     unemployment insurance
                                                                                                                     reports
Response rate and most          Forth-seven percent in 2011                     Eighty-three percent for private     Fifty-six percent for private
recent data, as of April 2012                                                   establishments in 2010               industry in 2011
Key eligibility requirement for the credit, and whether the source contains data
                                                                                                                           c
Employer is a for-profit or tax- Yes                                            Yes                                  Yes
exempt entity
Employer offers health          Yes                                             Yes                                  Yes
insurance and pays at least
50 percent of premiums
Employer has fewer than 25      No—number of employees                          No—number of employees               No—number of
full-time equivalents (FTE)                                                                                          employees, from 1 to 49,
                                                                                                                     and number of full- and
                                                                                                                     part-time employees
Average annual wages are        No—percentage of full-time                      No—percentage of employees who No—wages are presented
                                                                                                                                  e
less than $50,000 per FTE       employees who make $23,000 or                   earned wages in one of three   in five percentiles
                                                                                          d
                                less per year                                   categories
                                            Source: GAO analysis of data sources.
                                            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
                                             Statistical models used by the National Compensation Survey are able to control for profit/non-profit
                                            status.




                                            Page 41                                                 GAO-12-549 Small Employer Health Tax Credit
Appendix VI: Publically Available Data on
Small Employer Health Insurance




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.




Page 42                                             GAO-12-549 Small Employer Health Tax Credit
Appendix VII: Comments from the Internal
              Appendix VII: Comments from the Internal
              Revenue Service



Revenue Service




              Page 43                                    GAO-12-549 Small Employer Health Tax Credit
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
                  Appendix VIII: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  James R. White, (202) 512-9110 or whitej@gao.gov
GAO Contact
                  In addition to the contact named above, Thomas Short, Assistant
Staff             Director; Susan Baker; Amy Bowser; Ellen Grady; George Guttman;
Acknowledgments   Donna Miller, Ruben Montes de Oca, Edward Nannenhorn; Robert
                  Gebhart; Crystal Robinson; Cynthia Saunders; and Lindsay Swenson
                  made key contributions to this report.




(450922)
                  Page 46                                GAO-12-549 Small Employer Health Tax Credit
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