By: Robb Mandelbaum, The New York Times
The Agenda has now profiled three small businesses that are struggling in different ways with providing health insurance to employees. (Previous related stories: Small-Business Health Care Profiles) The companies are very different — they trade in very different parts of the economy, and couldn't be located much further apart geographically — but they do have one thing in common: Though all three have fewer than 25 employees, not one has qualified for the tax credit in the Affordable Care Act that was intended to help small businesses pay for health insurance. Indeed, the credit is one element of the controversial health law that has already fallen short of expectations.
Estimates
of the number of businesses eligible to take the tax credit have ranged
from 1.4 million to 4 million companies, but in May, the Government
Accountability Office reported that only 170,300 firms actually claimed
the credit in 2010. Of these, only a small fraction, 17 percent, were
able to claim the whole credit.
For
eligible companies, the credit effectively refunds 35 percent of health
insurance expenses between 2010 and 2013.* After 2014, the credit
increases to 50 percent and is available for any two consecutive years.
The credit is fully available to companies with 10 or fewer full-time
employees and average wages below $25,000. It phases out as the number
of employees rises to 25 and wages grow to $50,000. In 2009, there were
about 4.6 million companies with fewer than 10 employees, according to
the Census Bureau, and 5.7 million with fewer than 100.
The
credit was aimed squarely at the smallest companies, which rarely offer
health insurance to employees. However, as we reported two weeks ago,
it appears not to have persuaded very many to start offering insurance.
The most recent study of employer health insurance from the Kaiser
Family Foundation found that just half of all companies with fewer than
10 employees offered insurance, a share that has not moved much since
2005.
So why has the credit fallen short of
expectations? The G.A.O. concluded that the credit was too small to sway
business owners. Moreover, it said, claiming the credit is a task so
complicated as to discourage many companies from trying. Companies have
to determine the number of hours each employee worked in the year, as
well as compile information about their insurance premiums.
"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," the report said, citing
conversations with tax preparers. "Tax preparers told us it could take
their clients from two to eight hours or possibly longer to gather the
necessary information to calculate the credit and that the tax preparers
spent, in general, three to five hours calculating the credit."
The G.A.O. report hints at the complexity with this delicious example:
On
its Web site, I.R.S. 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.
It may be tempting to hold the Internal Revenue Service responsible for whatever burden accompanies the tax credit, but in this case, the complexity is written directly into the law. It turns out that legislators wrote the provision in a way that makes it appear more generous than it really is. Many businesses with both fewer than 25 employees and average wages below $50,000 are in fact unable to claim the credit.
Under
the law, once such a business has calculated its potential credit, it is
required to reduce the credit first to account for any excess employees
over 10 and then separately reduce the potential credit to account for
any excess average wages paid over $25,000. For many companies, the two
reductions exceed the potential credit itself - meaning the business
gets no credit.
That's
what happened to Carrie Van Dyck, who along with her husband owns the
Herbfarm Restaurant outside of Seattle. Excluding its owners, the
Herbfarm, which we profiled in June, employed the equivalent of about 21
or 22 full-time staff members, who were paid an average wage of about
$35,000 - a few thousand dollars over the credit's threshold for 21
employees. The result surprised Ms. Van Dyck, she said recently by
e-mail, because "it would seem that we are a pretty typical small,
mom-and-pop type business that this should apply to."
Of
course, by making the credit less generous, the senators who wrote the
law made it less expensive to the United States Treasury. Now it is
apparent that credit will be even cheaper than planned: initially it was
expected to cost the Treasury $2 billion in 2010; instead it cost the
government only a quarter of that.
The law also excludes owners and owners' families from counting toward the credit, which can cut both ways. On the one hand, owners don't count as employees and their salaries are excluded from the annual wages, exclusions that could make some companies eligible for a bigger credit than they might otherwise have gotten. On the other hand, premiums paid for the owners' and their families' insurance aren't eligible for the credit, which for some companies, as You're The Boss commenter JAB recently noted, "greatly reduces the incentive to provide coverage for employees."
The
White House has said that the number of businesses claiming the credit
for 2011 has grown to at least 360,000, but that is still well below
even the smallest estimate of eligible businesses. Some advocates for
the law say that more businesses will take advantage of the credit in
2014, when it grows to 50 percent, especially if the new insurance
exchanges make it easier and cheaper for small companies to offer
insurance.
The
Obama administration has proposed making more businesses eligible for
the credit, in part by starting phase-outs at higher thresholds, and
also by changing the way it is calculated so that every business within
the limits, such as the Herbfarm Restaurant, can take some amount of
credit.
But
judging from the comments of Representative Sam Graves, chairman of the
House Small Business Committee, the initiative is unlikely to pass a
Republican-controlled House anytime soon. "This tax credit has already
largely failed to attract small-business owners, and expanding it will
not make the president's health care law affordable," the Missouri
Republican said in a statement. "For small employers that do not offer
health insurance, tax incentives are unlikely to cause many of them to
choose a massive new expense they just cannot afford in the first
place." It was Mr. Graves who sought the G.A.O. report.
Of
course, a business denied a credit has not been made worse off by the
2010 health law. But the law surely has raised and dashed a lot of
hopes, and these are the early days - the sweeping changes that are the
law's hallmark don't come until 2014.
*There are, of course, many caveats here, but the main one is that the company has to pay at least half of the premium.
