SMALL EMPLOYER 

HEALTH TAX 

CREDIT

Factors Contributing 

to Low Use and 

Complexity

Report to Congressional Requesters

May 2012

GAO-12-549

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-549, a report to 

congressional requesters

May 2012

SMALL EMPLOYER HEALTH TAX CREDIT

Factors Contributing to Low Use and Complexity

Why GAO Did This Study

Many small employers do not offer 

health insurance. The Small Employer 

Health Insurance Tax Credit was 

established to help eligible small 

employers—businesses or tax-exempt 

entities—provide health insurance for 

employees. The base of the credit is 

premiums paid or the average 

premium for an employer’s state if 

premiums paid were higher. In 2010, 

for small businesses, the credit was 35 

percent of the base unless the 

business had more than 10 FTE 

employees or paid average annual 

wages over $25,000. 

GAO was asked to examine (1) the 

extent to which the credit is claimed

and any factors that limit claims, 

including how they can be addressed; 

(2) how fully IRS is ensuring that the 

credit is correctly claimed; and (3) what 

data are needed to evaluate the effects 

of the credit.

GAO compared IRS data on credit 

claims with estimates of eligible 

employers, interviewed various credit 

stakeholders and IRS officials as well 

as academicians on evaluation, 

compared IRS credit compliance 

documents with the rules and practices 

used for prior tax provisions and IRS 

strategic objectives, and reviewed 

literature and data.

What GAO Recommends

GAO recommends that IRS 

(1) improve instructions to examiners

working on cases on the credit and 

(2) analyze results from examinations 

of credit claimants and use those 

results to identify and address any 

errors through alternative approaches. 

IRS agreed with GAO’s 

recommendations.

What GAO Found

Fewer small employers claimed the Small Employer Health Insurance Tax Credit 

in tax year 2010 than were estimated to be eligible. While 170,300 small 

employers claimed it, estimates of the eligible pool by government agencies and 

small business advocacy groups ranged from 1.4 million to 4 million. The cost of

credits claimed was $468 million. Most claims were limited to partial rather than

full percentage credits (35 percent for small businesses) because of the average 

wage or full-time equivalent (FTE) requirements. As shown in the figure, 28,100 

employers claimed the full credit percentage. In addition, 30 percent of claims 

had the base premium limited by the state premium average.

Number of Small Employers Claiming the Full and Partial Credit Percentages, by FTE and 

Wage Requirements for the Credit, Tax Year 2010

Notes: This information is based on the approximately 170,300 small employer claims. Numbers are 

rounded to the nearest hundred. Numbers don’t add up because of rounding. 

One factor limiting the credit’s use is that most very small employers, 83 percent 

by one estimate, do not offer health insurance. According to employer 

representatives, tax preparers, and insurance brokers that GAO met with, the 

credit was not large enough to incentivize employers to begin offering insurance. 

Complex rules on FTEs and average wages also limited use. In addition, tax 

preparer groups GAO met with generally said the time needed to calculate the 

credit deterred claims. Options to address these factors, such as expanded 

eligibility requirements, have trade-offs, including less precise targeting of 

employers and higher costs to the Federal government. 

The Internal Revenue Service (IRS) incorporated practices used successfully for 

prior tax provisions and from IRS strategic objectives into its compliance efforts

for the credit. However, the instructions provided to its examiners (1) do not 

address the credit’s eligibility requirements for employers with non-U.S. 

addresses and (2) have less detail for reviewing the eligibility of tax-exempt 

entities’ health insurance plans compared to those for reviewing small business 

plans. These omissions may cause examiners to overlook or inconsistently treat 

possible noncompliance. Further, IRS does not systematically analyze 

examination results to understand the types of errors and whether examinations 

are the best way to correct each type. As a result, IRS is less able to ensure that 

resources target errors with the credit rather than compliant claimants.

Currently available data on health insurance that could be used to evaluate the 

effects of the credit do not match the credit’s eligibility requirements, such as 

information to convert data on number of employees to FTEs. Additional data 

that would need to be collected depend on the questions policymakers would 

want answered and the costs of collecting such data. 

View GAO-12-549. For more information, 

contact James R. White at (202) 512-9110 or 

whitej@gao.gov.
Page i GAO-12-549 Small Employer Health Tax Credit

Letter 1 

Background 3

Fewer Small Employers Claimed the Credit Than Were Thought to 

Be Eligible Because of Factors Such as Credit Size and 

Complexity 9

IRS Is Implementing Several Practices from Prior Compliance 

Efforts, but Additional Steps Could Be Taken 18

Data to Evaluate Many Questions about the Effects of the Credit 

Are Not Available 25

Conclusions 27

Recommendations for Executive Action 28

Agency Comments and Our Evaluation 29

Appendix I Scope and Methodology 31

Appendix II State Average Premiums for Small Group Markets for 2010 and 2011 34

Appendix III Adjustments in Counting Total Small Employer Claims and Total 

Credit Amount Claims for Tax Year 2010 36

Appendix IV Credit Claims by Employer Size and Wages Paid, Tax Year 2010 37

Appendix V Form 8941 and Worksheets for Claiming the Small Employer Health 

Insurance Tax Credit 38

Appendix VI Publically Available Data on Small Employer Health Insurance 41

Appendix VII Comments from the Internal Revenue Service 43

Contents
Page ii GAO-12-549 Small Employer Health Tax Credit

Appendix VIII GAO Contact and Staff Acknowledgments 46

Tables

Table 1: Examination Actions for Form 8941 as of February 2012, 

for Tax Year 2010 23

Table 2: State Average Premiums for Small Group Markets for 2010 

and 2011 34

Table 3: Publically Available Data on Small Employer Health 

Insurance 41

Figures

Figure 1: Percentage of Employers with Low-Wage Employees That 

Offer Health Insurance, 2000 through 2010, by Employer 

Size 3

Figure 2: Phaseout of the Credit for Small Businesses as a 

Percentage of Employer Contributions to Premiums, for 

2010 to 2013 7

Figure 3: Percentage and Number of Small Employers Claiming the 

Full and Partial Credit Percentages, by FTE and Wage 

Requirements for the Credit, Tax Year 2010 11

Figure 4: Form 8941 and Credit Calculations on Worksheets 

Related to IRS’s “3 Simple Steps” for Determining 

Potential Eligibility 14

Figure 5: Model of Potential Outcomes and Influential Factors for 

the Small Employer Health Insurance Tax Credit 26

Figure 6: Number of Credit Claims by Taxpayer Type, Tax Year 

2010 36
Page iii GAO-12-549 Small Employer Health Tax Credit

Abbreviations

CBO Congressional Budget Office 

COBRA Consolidated Omnibus Budget Reconciliation Act 

FTE full-time equivalent 

HHS Department of Health and Human Services 

IRS Internal Revenue Service 

JCT Joint Committee on Taxation 

MEA Math Error Authority 

MEPS Medical Expenditure Panel Survey 

NFIB National Federation of Independent Businesses 

PPACA Patient Protection and Affordable Care Act 

SBA Small Business Administration 

SBM Small Business Majority 

SB/SE Small Business and Self-Employed Division

TEGE Tax Exempt and Government Entities Division

TETR Telephone Excise Tax Refund

TIGTA Treasury Inspector General for Tax Administration

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Page 1 GAO-12-549 Small Employer Health Tax Credit

United States Government Accountability Office

Washington, DC 20548

May 14, 2012

The Honorable Olympia J. Snowe

Ranking Member

Committee on Small Business and Entrepreneurship

United States Senate

The Honorable Sam Graves

Chairman

Committee on Small Business

House of Representatives

Many small employers do not offer health insurance to their employees. 

This is particularly true for small employers paying low wages. According 

to data from the Medical Expenditure Panel Survey (MEPS)1

To provide an incentive for small employers to provide health insurance, 

and to make insurance more affordable, Congress included the Small 

Employer Health Insurance Tax Credit (referred to in this report as the 

credit) in the Patient Protection and Affordable Care Act (PPACA).

about 17 

percent of employers with less than 10 employees who earn low wages 

(50 percent or more of their employees earn $11.50 per hour or less) 

offered health insurance to their employees in 2010, while about 90 

percent of employers with 100 to 999 employees who earn low wages 

did.

2

 

1

MEPS is a set of large-scale surveys. MEPS is administered by the Agency for 

Healthcare Research and Quality in the Department of Health and Human Services. The 

2010 Insurance Component survey had a response rate of about 83 percent for private 

establishments, and 38,409 respondents, including for-profit, and nonprofit employers; 

government units are excluded from these statistics.

The 

credit is available for tax years beginning after December 31, 2009 to 

certain employers with employees earning low wages— small business 

and tax-exempt entities—that pay at least half of their employees’ health 

insurance premiums. The Congressional Budget Office (CBO) and the 

Joint Committee on Taxation (JCT) jointly estimated that the credit would 

2

Pub. L. No. 111-148, §§ 1421, 10105, 124 Stat. 119 (Mar. 23, 2010), (codified at 26 

U.S.C. § 45R). 

 
 

Page 2 GAO-12-549 Small Employer Health Tax Credit

cost $2 billion in fiscal year 2010 and $40 billion from fiscal years 2010 to 

2019.3

You asked us to review the implementation of the credit. Specifically, we 

examined

• to what extent the credit is being claimed and what factors, if any, limit 

employer claims, and how these factors can be addressed;

• how fully the Internal Revenue Service (IRS) is ensuring that the 

credit is correctly claimed by eligible employers; and

• what data are needed to evaluate the effects of the credit.

To describe the extent to which the credit is being claimed, we reviewed 

IRS data on the claims for tax year 2010. To identify any factors that may 

limit credit claims and to assess how they could be addressed, we 

interviewed IRS officials as well as groups representing employers, tax 

preparers, and insurance brokers, and worked with them to assemble 

discussion groups on the credit. To assess how these factors could be 

addressed, we analyzed our interview results as well as relevant 

documents. Where possible, we identified IRS or MEPS data related to 

the factors. To assess how IRS is ensuring that the tax credit is correctly 

claimed by eligible employers we reviewed its compliance plans for the 

credit and compared them to practices used successfully for prior tax 

provisions4

We conducted this performance audit from July 2011 through May 2012 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

and IRS strategic objectives. We interviewed IRS officials on 

their compliance efforts. To assess what data would be needed to 

evaluate the effects of the credit, we conducted a literature review and 

interviewed interest groups and subject matter specialists from 

government, academia, research foundations and think tanks. We found

the data we used to be sufficiently reliable for the purposes of our report.

 

3

CBO, letter to the Honorable Nancy Pelosi, Speaker of the U.S. House of 

Representatives (Washington, D.C.: Mar. 18, 2010). 

4

For example, see GAO, Tax Refunds: Enhanced Prerefund Compliance Checks Could 

Yield Significant Benefits, GAO-11-691T (Washington, D.C.: May 25, 2011).
 

Page 3 GAO-12-549 Small Employer Health Tax Credit

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. (See app. I for our scope and 

methodology.)

Small employers with low-wage employees do not commonly offer health 

insurance, compared with large employers with low-wage employees, as 

shown in figure 1.

Figure 1: Percentage of Employers with Low-Wage Employees That Offer Health 

Insurance, 2000 through 2010, by Employer Size

Notes: Figure includes for-profit and nonprofit (tax-exempt) entities but not government entities. A 

low-wage employer is defined as an employer that has 50 percent or more of its employees earning a 

low wage (earning $11.50 per hour or less, which is an annual salary of, at most, about $23,920). 

Data were not collected for the MEPS Insurance Component for 2007.

Background 

Small Employer Health 

Insurance Market
 

Page 4 GAO-12-549 Small Employer Health Tax Credit

A combination of factors explains why small, low-wage employers tend 

not to offer health insurance.5

• For very low-wage employees, such as minimum wage employees,

6

health insurance drives up total compensation costs for employees. 

• Low-wage employees working for small employers generally prefer to 

receive wages over insurance benefits as part of total compensation. 

On one hand, while employees pay both income and employment tax 

on wages, employees do not have to pay income or employment 

taxes on premiums paid by their employers for health insurance. 

However, for low-wage employees, the income tax exclusion is worth 

less relative to cash wages than for higher-income employees 

because low-wage employees may be in a lower income tax bracket.7

• Insurers of small employers face higher per-employee fixed costs for 

billing and marketing8 and are less able to pool risk9

 

5

For additional description of challenges for small employers providing coverage, see 

GAO, Private Health Insurance: Small Employers Continue to Face Challenges in 

Providing Coverage, 

across large 

numbers of employees. As a result, plans offered to small employers 

GAO-02-8 (Washington, D.C.: Oct. 31, 2001). 

6

In general, the federal minimum wage is $7.25 per hour. Many states also have minimum 

wage laws and minimum wages vary from state to state. 

7

See Quantria Strategies/Small Business Administration, Health Insurance in the Small 

Business Market: Availability, Coverage, and the Effect of Tax Incentives (Cheverly, Md.: 

September 2011).

8

CBO estimated that for firms with 25 or fewer employees, 26 percent of premiums goes 

toward insurers’ administration costs, compared with 7 percent for firms with at least 1,000 

employees; see CBO, Key Issues in Analyzing Major Health Insurance Proposals 

(Washington, D.C.: December 2008).

9

Risk pooling spreads risk across a group; a larger pool stabilizes the average insurance 

costs. Smaller risk pools raise costs because insurers run the risk of insuring those with 

relatively high health care needs. As a result, insurers may increase premiums to better 

ensure that they can cover unexpectedly large health care costs.
 

Page 5 GAO-12-549 Small Employer Health Tax Credit

are likely to have higher premiums or have less coverage and higher 

out-of-pocket costs than plans offered to large employers.10

IRS’s Small Business and Self-Employed Division (SB/SE) and Tax 

Exempt and Government Entities Division (TEGE) are primarily 

responsible for implementing the credit. IRS works with the Department of 

Health and Human Services (HHS) and the Small Business 

Administration (SBA) on implementation tasks, such as outreach and 

communication.

To be eligible, an employer must:

• Be a small business11 or tax-exempt employer12 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

 

10The 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.

11For 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. 

12The 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).

13To 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.

14Other exclusions are seasonal employees, unless they work for the employer on more 

than 120 days in the tax year, and ministers who are deemed to be self-employed. Leased 

employees are included in FTE calculations.

IRS Implementation and 

Requirements for 

Calculating and Claiming 

the Credit
 

Page 6 GAO-12-549 Small Employer Health Tax Credit

• Pay average annual wages of less than $50,000 per FTE in the tax 

year.15

• Offer health insurance and pay at least 50 percent of the health 

insurance premium under a “qualifying arrangement.” This means that 

the employer uniformly pays at least 50 percent of the cost of 

premiums for enrolled employees, although IRS did develop relaxed 

criteria for meeting this requirement for tax year 2010.16

The President’s fiscal year 2013 budget request contains a proposal for 

expanding the credit’s eligibility criteria to include employers with 50 or 

fewer FTEs and removing the uniform contribution requirement.

The amount of the credit that employers can claim depends on several 

factors. Through 2013, small businesses can receive up to 35 percent 

and tax-exempt entities can receive up to 25 percent of their base 

payments for employee health insurance premiums; these portions rise to 

50 percent and 35 percent, respectively, starting in 2014. Employers can 

receive the full credit percentage if they have 10 or fewer FTEs and pay 

an average of $25,000 or less in annual wages; employers with 11 to 25 

FTEs and average wages exceeding $25,000 up to $50,000 are eligible 

for a partial credit that “phases” out to zero percent of premium payments 

as the FTE and wage amounts rise. Figure 2 shows the phaseout of the 

credit for small businesses; the phaseout for tax-exempt entities follows a 

similar pattern, up to 25 percent of health insurance premiums.

 

15Wages 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.

16IRS offered a transition rule on the “qualifying arrangement” criteria for tax year 2010 

and for satisfying the uniformity requirement. IRS Notice 2010-44.

Limits on the Credit Amount
 

Page 7 GAO-12-549 Small Employer Health Tax Credit

Figure 2: Phaseout of the Credit for Small Businesses as a Percentage of Employer Contributions to Premiums, for 2010 

to 2013

Note: GAO adapted the graphic from Congressional Research Service, Summary of the Small 

Business Health Insurance Tax Credit Under PPACA (P.L. 111-148) (Washington, D.C.: Apr. 5,

2010). 

Further, the amount of the credit is limited if the premiums paid by an 

employer are more than the average premiums determined by HHS for 

the small group market in the state in which the employer offers 

insurance. The credit percentage is multiplied by the allowable premium 

to calculate the dollar amount of credit claimed. For example, in Alabama, 

the state average premium was $4,441 for a single employee in 2010. If 

an employer claiming the credit in Alabama paid $5,000 for a single 

employee’s health premium, the credit would be calculated using the 

state average premium of $4,441 rather than the actual premium paid. 

Appendix II shows the average premiums by state.

The proposal in the President’s Budget suggests beginning the phaseout 

at 21 FTEs, rather than 11, as well as providing for a more gradual 
 

Page 8 GAO-12-549 Small Employer Health Tax Credit

combined phaseout for the credit percentages and removing the state 

market limits.

Employers are to calculate the credit amount on IRS Form 8941, “Credit 

for Small Employer Health Insurance Premiums.” Small businesses are to 

claim the credit as part of the general business tax credit (on Form 3800), 

and use it to offset actual tax liability. If they do not have a federal tax 

liability, they cannot receive the credit as a refund but may carry the credit 

forward or back to offset tax liabilities for other years.17 Credit amounts 

claimed by partnerships and S corporations are to be passed through to 

their partners and shareholders, respectively,18 who may claim their 

portions of the credit on their individual income tax returns.19

Employers that claim the credit can also deduct health insurance 

expenses on their tax returns but must subtract the amount of the credit 

from the deduction. Employers can claim the credit for up to 6 years—the 

initial 4 years from 2010 through 2013 and any 2 consecutive years after 

2013 if they buy insurance through the Small Business Health Option 

Programs, which are part of the insurance exchanges to be established 

under PPACA.

Tax-exempt 

entities are to claim the credit on Form 990-T, “Exempt Organization 

Business Income Tax Return,” and receive the credit as a refund even 

though the employer has no taxable income.

20

 

17The 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.

18Owners 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.

19For partners and shareholders, the credit is to be entered on the Schedule K-1 to be 

filed with an income tax return. 

20PPACA requires the establishment of exchanges in each state by January 1, 2014, 

which are to help eligible individuals and small employers compare and select insurance 

coverage from among participating health plans. See Pub. L. No. 111-148, § 1311(b), 124 

Stat. 119, 173 (Mar. 23, 2010).

Process for Claiming the Credit
 

Page 9 GAO-12-549 Small Employer Health Tax Credit

Fewer small employers claimed the credit for tax year 2010 than were 

thought to be eligible based on rough estimates of eligible employers 

made by government agencies and small business groups. IRS data on 

total claimants, adjusted to account for claims by partners and 

shareholders, show that about 170,300 small employers made claims for 

the credit in 2010.21

Selected estimates, made by government agencies and small business 

groups, of employers eligible for the credit range from around 1.4 million 

to 4 million. However, data limitations mean that these estimates are 

necessarily rough. Based on our review of available data sources on the 

three basic eligibility rules for the credit—involving wages, FTEs, and 

health insurance—it is not possible to combine data from various sources 

to closely match these rules. (See app. VI for details.) Though statistical 

modeling corrects for imperfect data to match these rules, models are not 

precise. While acknowledging the data limitations, several entities 

produced estimates of the number of employers potentially eligible for the 

credit. The Council of Economic Advisors estimated 4 million and SBA 

(See app. III for adjustments to determine claims filed 

by employers.) The average credit amount claimed was about $2,700. 

Limited information is available on the distribution of claim amounts for 

business entities because IRS focuses its data collection on the 

taxpayers filing credit claims, who may be partners or shareholders 

claiming their portions of a business entity’s credit. Appendix III provides 

additional detail.

 

21The number of employees who had their premiums paid by employers that claimed the 

credit was about 770,000.

Fewer Small 

Employers Claimed 

the Credit Than Were 

Thought to Be Eligible 

Because of Factors 

Such as Credit Size 

and Complexity

Actual Credit Claims Were 

Much Lower Than Initial 

Rough Eligibility Estimates
 

Page 10 GAO-12-549 Small Employer Health Tax Credit

estimated 2.6 million.22 Other groups making estimates included small 

business groups such as the Small Business Majority (SBM) and the 

National Federation of Independent Businesses (NFIB). Their estimates 

were 4 million and 1.4 million, respectively.23

A similar pattern is seen when the dollar value of credits actually claimed 

is compared to initial estimates. The dollar value of claims made in 2010 

was $468 million compared to initial cost estimates of $2 billion for 2010 

(a CBO and JCT joint estimate).24

Most of the claims were for less than the full credit percentage. Of the 

approximately 170,300 small employers making claims for tax year 2010, 

142,200—83 percent—could not use the full credit percentage. Usually 

employers could not meet the average wage requirement to claim the full 

percentage, as about 68 percent did not qualify based on wages but did 

meet the FTE requirement. (See fig. 3.)25

 

22The 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.

23The 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. 

24CBO 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. 

25See app. IV for a graph of claimants with fewer than 10 FTEs and the amount of full 

credits.

Most Small Employer 

Claims Were Reduced 

Because of the Phaseout 

Rules and Some Were 

Reduced by the State 

Average Premiums
 

Page 11 GAO-12-549 Small Employer Health Tax Credit

Figure 3: Percentage and Number of Small Employers Claiming the Full and Partial 

Credit Percentages, by FTE and Wage Requirements for the Credit, Tax Year 2010

Notes: This information is based on the approximately 170,300 small employer claims. Numbers are 

rounded to the nearest hundred. Numbers and percentages do not add to totals because of rounding.

State average premiums also reduced some credit amounts by reducing 

the amount of the premium base against which the credit percentage is 

applied. This premium base may be reduced when it exceeds the state 

average premiums for small group plans,26 as determined by HHS. If so, 

small employers are to use the state average amount, which in essence 

caps the premium amount used to calculate their credit. According to IRS 

data, this cap reduced the credit for around 30 percent of employer 

claims. For example, a nonprofit representative told us that her credit 

dropped from $7,900 to $3,070 because of the cap in her state. (See app. 

II for small group average premiums in all states.)

 

26A small group plan is a health coverage plan sponsored by small employers for the 

employees.
 

Page 12 GAO-12-549 Small Employer Health Tax Credit

As already discussed, small employers do not commonly offer health 

insurance. MEPS estimates that 83 percent of employers who may 

otherwise be eligible for the full credit27 did not offer health insurance in 

2010 and that 67 percent of employers who could be eligible for the 

partial credit28

Furthermore, the small employers do not likely view the credit as a big 

enough incentive to begin offering health insurance and to make a credit 

claim, according to employer representatives, tax preparers, and 

insurance brokers we met with. While some small employers could be 

eligible for the credit if they began to offer health insurance, small 

business group representatives and discussion group participants told us 

that the credit may not offset costs enough to justify a new outlay for 

health insurance premiums. Related to this concern, the credit being 

available for 6 years overall and just 2 consecutive years after 2014 

further detracts from any potential incentive to small employers to start 

offering health insurance in order to claim the credit.

did not offer insurance. Our discussion groups and other 

interviewees confirmed this, with comments and examples of small, lowwage employers not offering health insurance to employees.

Most discussion group participants and groups we interviewed found the 

tax credit to be complicated, deterring small employers from claiming it. 

The complexity arises from the various eligibility requirements, the 

various data that must be recorded and collected, and number of 

worksheets to be completed.

A major complaint we heard centered on gathering information for and 

calculating FTEs and the health insurance premiums associated with 

those FTEs. Eligible employers reportedly did not have the number of 

hours worked for each employee readily available to calculate FTEs and 

their associated average annual wages nor did they have the required 

health insurance information for each employee readily available. 

 

27This 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. 

28This MEPS statistic is based on employers—both profit and nonprofit—with 10 to 25 

employees that pay annual wages of $24,000 or less to over half of their employees. 

Because the employers eligible for the partial credit can pay up to $50,000 in wages, this 

is a less precise estimate than using MEPS to estimate insurance offerings for the full 

credit.

Most Small Employers 

Could Not Meet the Health 

Insurance Requirement for 

the Credit and the Credit 

Was Not Seen as an 

Incentive to Start Offering 

Insurance 

Complexity Deterred Small 

Employer Claims, 

According to Discussion 

Groups 
 

Page 13 GAO-12-549 Small Employer Health Tax Credit

Exclusions from the definition of “employee” and other rules make the 

calculations complex. For example, seasonal employees are excluded 

from FTE counts but insurance premiums paid on their behalf count 

toward the employer’s credit. Incorporating the phaseout also complicates 

the credit calculation.

In our discussion groups with tax preparers, we heard that small business 

owners generally do not want to spend the time or money to gather the 

necessary information to calculate the credit, given that the credit will 

likely be insubstantial. Tax preparers told us it could take their clients from 

2 to 8 hours or possibly longer to gather the necessary information to 

calculate the credit and that the tax preparers spent, in general, 3 to 5 

hours calculating the credit.29

Tax preparers we interviewed said that IRS did the best it could with the 

Form 8941 given the credit’s complexity. IRS officials said they did not 

receive criticism about Form 8941 itself but did hear that the instructions 

and its seven worksheets were too long and cumbersome for some 

claimants and tax preparers. On its website, IRS tried to reduce the 

burden on taxpayers by offering “3 Simple Steps” as a screening tool to 

help taxpayers determine whether they might be eligible for the credit. 

However, to calculate the actual dollars that can be claimed, the three 

steps become 15 calculations, 11 of which are based on seven 

worksheets, some of which request multiple columns of information. 

Figure 4 aligns IRS’s “3 Simple Steps,” with the seven worksheets in the 

instructions for Form 8941 and the lines on Form 8941. (See app. V for 

full text for this figure.)

We did hear from a couple of participants—

a small business owner and a nonprofit representative—that they did not 

find the credit overly burdensome.

 

29The National Society of Accountants conducted a survey in 2008 that estimated the 

hourly tax preparer fee to be $122 an hour. Tax preparers may not necessarily charge for 

the credit, according to some discussion group participants. 
Figure 4: Form 8941 and Credit Calculations on Worksheets Related to IRS’s “3 Simple Steps” for 

Determining Potential Eligibility Interactive graphic

Page 14 GAO-12-549 Small Employer Health Tax Credit

Source: GAO analysis of IRS information.

Directions:

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

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
 

Page 15 GAO-12-549 Small Employer Health Tax Credit

Given the effort involved to make a claim and the uncertainty about the 

credit amounts, a few discussion group participants said it would be 

helpful to be able to quickly estimate employers’ eligibility for the credit 

and the amount they might receive; this would help them to decide 

whether the credit would be worth the effort, although this would not 

reduce the complication of filing out Form 8941 because, to fill out the 

form, full documentation would need to be reviewed. IRS’s Taxpayer 

Advocate Service30 is developing a calculator for IRS’s website to quickly 

estimate an employer’s eligibility, but this will still require gathering 

information such as wages, FTEs, and insurance plans. We also heard 

concerns that a calculator could cause confusion for clients who find they 

are eligible when quickly estimating the credit but then turn out to be 

ineligible or find they are eligible for a smaller credit when their 

accountant fills out Form 8941. 

Many small businesses reported that they were unaware of the credit.

The NFIB Research Foundation31 and the Kaiser Family Foundation both 

estimated that approximately 50 percent of small businesses were aware 

of the credit, as of May 2011, or more than 1 year after Congress 

authorized this credit.32

The extent to which being unaware prevented eligible employers from 

claiming the credit for tax year 2010 is not known. Some discussion group 

participants raised concerns about unawareness, but they also cited other 

factors limiting credit claims for tax year 2010. If 50 percent of small 

businesses knew about the credit, then the approximately 170,300 claims 

is a relatively small proportion of those that were knowledgeable. This 

indicates that other factors contributed to employers not claiming the 

credit. Further, it is hard to interpret the impact of awareness on claims 

because these surveys included an unknown number of small business 

 

30The 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. 

31The NFIB Research Foundation is a nonprofit affiliated with NFIB. 

32NFIB conducted this survey in April and May 2011 of 750 small employers of firms with 

50 or fewer employees. The Kaiser Family Foundation conducted its survey from January 

through May 2011 of 3,184 public and private firms with 3 or more employees and its 

questions about the credit were directed to employers with 50 or fewer employees.

The Extent to Which Lack 

of Awareness Is a Factor 

Limiting More Claims Is 

Unknown, Although IRS 

Did Significant Outreach
 

Page 16 GAO-12-549 Small Employer Health Tax Credit

employers that would not be eligible for the credit regardless of their 

awareness. For those employers that were unaware, the surveys did not 

account for their accountants or tax preparers that may have known about

the credit but did not tell their clients about it because they did not believe 

their clients would qualify or because the credit amount would be very 

small. In addition, the surveys did not cover tax-exempt entities.

To raise awareness of the credit, IRS did significant outreach. IRS 

developed a communication and outreach plan, written materials on the 

credit, a video, and a website. IRS officials also reached out to interest 

groups about the credit and developed a list of target audiences and 

presentation topics. IRS officials began speaking at events in April 2010 

to discuss the credit and attended over 1,500 in-person or web-based 

events from April 2010 to February 2012. Discussion of the credit at the 

events varied from being a portion of a presentation covering many topics 

to some events that focused on the credit with a dedicated discussion 

period.

IRS does not know whether its outreach efforts actually increased 

awareness of the credit or were otherwise cost-effective. It would be 

challenging to estimate the impact of IRS’s outreach efforts on awareness 

with a rigorous methodology; however, based on ongoing feedback they 

received from interest groups, IRS officials told us they believe their 

efforts have been worthwhile. IRS used some feedback from focus 

groups of tax preparers and from other sources33 to revise its outreach 

efforts. For example, IRS modified its outreach from initially focusing on 

tax preparers and small employers to including insurance brokers in 

2012.

Given that most small employers do not offer insurance and what we 

heard about the size of the credit not being big enough to incentivize 

offering health insurance,

34

 

33Each focus group in 2011 consisted of 12 tax preparers. IRS issued a report on the 

focus groups’ results on October 14, 2011. 

it may not be possible to significantly expand 

credit use without changing the credit’s eligibility. Most claims were for 

partial credits and many people we spoke with view the credit amount as 

34Given the previously discussed lack of knowledge or awareness, it is not clear that 

increasing outreach would increase credit usage.

Addressing Factors and 

Expanding Credit Use May 

Require Substantive 

Design Changes
 

Page 17 GAO-12-549 Small Employer Health Tax Credit

too small and temporary to justify providing health insurance when none 

is provided now. In addition, given that IRS has conducted extensive 

outreach about the credit, it is not likely that more outreach would 

significantly increase the number of businesses claiming the credit. 

Amending the eligibility requirements or increasing the amount of the 

credit may allow more businesses to take advantage of the credit,

35

• Increasing the amount of the full credit, the partial credit, or both. 

but 

these changes would increase its cost to the Federal government. 

Options include the following:

• Increasing the amount of the credit for some by eliminating state 

premium averages. 

• Expanding eligibility requirements by increasing the number of FTEs 

and wage limit allowable for employers to claim the partial credit, the 

full credit, or both. This expansion would not, however, likely affect the 

smallest employers which do not offer health insurance.

• Simplifying the calculation of the credit in the following ways:

• Using the number of employees and wage information already 

reported on the employer’s tax return. This could reduce the 

amount of data gathering as well as credit calculations because 

eligibility would be based on the number of employees and not 

FTEs. A trade-off with this option would be less precision in 

targeting the full and partial credit amount to specific small 

employer subgroups.36

• Offering a flat credit amount per FTE (or number of employees) 

rather than a percentage, which would reduce the precision in 

targeting the credit.

 

35Three 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.

36Using the number of employees instead of FTEs would require an increase in the 

number of eligible employees in order to reach the same population of small employers. 

For example, two part-time employees working 20 hours per week count as one FTE, 

making the employer appear larger than if FTEs were counted. 
 

Page 18 GAO-12-549 Small Employer Health Tax Credit

The data limitations that made it difficult to estimate the number of 

businesses eligible for the current credit also make it difficult to estimate 

the impact of any design changes.

IRS’s compliance efforts for the credit incorporate practices that have 

been shown effective in helping to ensure compliance with other tax 

provisions or are consistent with IRS strategic objectives. Some of those 

practices were used for the Telephone Excise Tax Refund (TETR)37 and 

Consolidated Omnibus Budget Reconciliation Act (COBRA) subsidies for 

health insurance for the unemployed, according to IRS officials.38

• Using computerized filters to review credit claims on Forms 8941 for 

certain errors or potential problems that may trigger an examination of 

the claim.

Specifically, IRS is doing the following:

• Transcribing more lines of data from Form 8941 into IRS computer 

systems which should make the filters more effective. Although 

transcribing more lines increases processing and data storage costs, 

IRS plans to transcribe more lines for tax years 2011 and 2012 claims 

to ensure better verification of eligibility.

 

37We 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).

38We tested IRS’s internal controls for the COBRA unemployment subsidies in the 

American Recovery and Reinvestment Act and found that IRS was able to identify all five 

fictitious companies used to fraudulently apply for the subsidies. See GAO Proactive 

Testing of ARRA Tax Credits for COBRA Premium Payments, GAO-10-804R

(Washington, D.C.: June 14, 2010).

IRS Is Implementing 

Several Practices 

from Prior 

Compliance Efforts, 

but Additional Steps 

Could Be Taken

IRS Incorporated Practices 

from Strategic Objectives 

and Prior Compliance 

Efforts 
 

Page 19 GAO-12-549 Small Employer Health Tax Credit

• Freezing refunds of tax-exempt entities whose returns have been 

selected for examination, which avoids the costs of trying to recover 

funds.39

• Considering the documentation burden on claimants. IRS did not 

require claimants to submit documentation on health insurance 

premiums with their Form 8941 because IRS officials said they will 

review examination results and may revisit the decision not to require 

documentation if results suggest that such documentation would 

improve compliance checks.

• Modifying filters, as needed, in response to observed trends. For 

example, a filter that applies to tax-exempt organization claims was 

tripped by about a quarter of claimant organizations, as of 

December 31, 2011. IRS officials said some eligible tax-exempt 

entities tripped the filter because it was too broad. To address this, 

IRS modified the filter to more clearly identify qualifying tax-exempt 

organizations.

• Completing a risk assessment on compliance issues related to the 

credit. The assessment identified risks involving refunds for taxexempt 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

 

39See GAO, Tax Gap: Complexity and Taxpayer Compliance,

which IRS officials said 

GAO-11-747T (Washington, 

D.C.: June 28, 2011). 

40The 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). 

41These three IRS filters are to check whether credit claims are consistent with eligibility 

requirements subject to computation criteria. 
 

Page 20 GAO-12-549 Small Employer Health Tax Credit

does not justify the costs to develop procedures to use MEA, if it were 

granted.42

IRS developed 21 filters for Form 8941, some of which apply differently to 

SB/SE and TEGE taxpayers. The filters cover some of the eligibility 

requirements for the credit. Errors on about 3.5 percent (11,763) of Forms 

8941 for tax year 2010 tripped 1 or more filters; almost half of those forms 

were from tax-exempt entities. According to IRS officials, the filter failure 

rate is consistent with other recent tax credits.

The filters do not cover all of the credit’s requirements for several datarelated reasons.43

Some Form 8941 filters also face limitations mainly because of problems 

with data or IRS’s systems.

In one case, data are not included on Form 8941 but 

may be included on worksheets required to be retained by claimants 

(e.g., information on business owner family members or seasonal 

employees included in credit calculations); in another case, certain data 

are not transcribed (e.g., the credit amount for certain claimants). For 

other requirements, IRS officials stated that reasonable filters cannot 

easily be developed because of challenges with matching data.

• Filters are mutually exclusive, meaning that filters on related 

requirements are viewed in isolation. However, according to IRS 

officials, IRS has ways to identify whether a form failed more than one 

filter, which IRS considers when identifying returns for potential 

examination.

• Some filters may mistakenly target eligible claimants because the 

filters rely on general thresholds in Form 8941 data or, in some cases, 

other IRS data (such as employee-level data) that are not exact 

matches to data on the Form 8941.

 

42We 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).

43We do not describe the filters and the eligibility requirements not being covered in detail 

because of concerns about revealing IRS’s compliance approach and criteria. 

Filters Check Some 

Eligibility Criteria, but Are 

Limited by Available Data
 

Page 21 GAO-12-549 Small Employer Health Tax Credit

Data on Forms W-2 (employees’ annual Wage and Tax Statement) could 

provide additional data for filters once the provision in PPACA is 

implemented that requires employers to report the cost—including both 

employer and employee contributions—of certain types of health 

insurance provided to an employee.44 IRS officials said the data have 

limited use because, among other things, they would not provide details 

for determining whether an employer met the credit’s requirements for 

health insurance; therefore, IRS officials will not pursue using the data at 

this time. Nevertheless, the data could be used in a filter to identify 

claimants who reported no health insurance contributions on Form W-2 

and therefore may not be offering health insurance. In the absence of 

other documentation or third-party reporting on health insurance, using 

Form W-2 data in a filter could be a cost-effective, rough indicator of 

whether a claimant is paying employee health insurance premiums, 

without increasing taxpayer burden. However, IRS provided transition 

relief to employers that file fewer than 250 Forms W-2 per year, and 

issued guidance stating that these employers will not be required to report 

the data until further guidance is issued. As a result, it is unlikely that the 

data could be useful before 2014, the year when the credit will only be 

available to employers for any 2 consecutive years.

After the filters are run, IRS creates lists of claims to consider for further 

examination. SB/SE wanted enough examination cases to spot check 

different filters and claims from different regions, to enable them to 

establish a field presence and to learn about compliance risks with the 

credit, according to an SB/SE official.45 Examination staff in SB/SE and 

TEGE are to follow a set of instructions when doing examinations.46

SB/SE’s examination instructions address all of the credit’s requirements 

for small businesses to claim the credit except that they do not include 

 

44See 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. 

45TEGE established two mandatory filters that if failed, automatically trigger an exam; only 

16 forms tripped these two filters, as of December 31, 2011. 

46Examiner instructions consist of several types of documents, such as worksheets and 

checklists on the credit’s eligibility requirements; we also refer to these documents as 

examination “guidance.” 

Examination Instructions 

Cover Most Eligibility 

Requirements, but Gaps 

Exist 
 

Page 22 GAO-12-549 Small Employer Health Tax Credit

specific instructions for examiners on determining eligibility of claimants 

with non-U.S. addresses. An employer located outside of the United 

States with a business or trade interest in the United States may claim the 

credit only if the employer pays premiums for coverage issued in and 

regulated by one of the states or the District of Columbia. Without a 

prompt in examination instructions, IRS examiners may overlook 

claimants that do not comply with the address requirements. An SB/SE 

official said IRS has no instructions for examiners to review claimants with 

non-U.S. addresses during an examination on the credit because 

potential compliance problems with businesses with non-U.S. addresses 

exist for other tax credits. This, however, was not IRS’s approach for 

another general business tax issue relevant to the credit—whether 

claimants that carry back the credit to offset tax liabilities in previous 

years did so properly. Near the end of our work, SB/SE added guidance 

to one of its examination instruction documents to cover the carry back 

issue.

Instructions for TEGE examiners also address most of the eligibility 

requirements to claim the credits, but, like SB/SE’s, TEGE examination 

instructions do not address how to review claimants with non-U.S. 

addresses.47

According to IRS officials, the TEGE examiners are trained specifically for 

doing examinations on the credit and therefore need less guidance than 

SB/SE examiners, who work on multiple issues simultaneously. However, 

TEGE examination documents contain detailed guidance in a workbook

Further, TEGE instructions for some of the credit’s 

requirements have less detail compared to SB/SE’s instructions. TEGE’s 

instructions provide steps on how to determine if an employer’s insurance 

premiums paid met “qualifying arrangement” and other criteria, but they 

provide less detail than SB/SE instructions. For example, SB/SE 

guidance instructs examiners to review health insurance policies and 

invoices to confirm premium payments, and to review other 

documentation to check whether the employer offers health benefits that 

are not eligible for the credit. TEGE instructions do not suggest these 

steps and also do not provide a prompt for examiners to ensure that 

insurance premiums paid on behalf of seasonal employees are included 

in calculations.

 

47Tax-exempt entities with non-U.S. addresses must pay health insurance premiums for 

an employee’s coverage issued in and regulated in one of the states or the District of 

Columbia. 
 

Page 23 GAO-12-549 Small Employer Health Tax Credit

format for these trained examiners on other credit requirements. Without 

detailed guidance for TEGE examiners that instructs them on how to 

examine health insurance documents, examiners may not consistently 

identify noncompliance, which could lead to erroneous credit refunds. 

This could particularly be the case as examining health insurance 

documents to check eligibility for this new credit has not been typical work 

for these examiners.

For tax year 2010, SB/SE plans to conduct over 1,500 examinations 

related to the credit, and TEGE anticipates about 1,000 examinations. An 

SB/SE official said the number of examinations is expected to provide 

initial compliance information and allow IRS to establish a compliance 

presence without committing too many resources initially. TEGE selected 

its number of examinations based on resource decisions, before tax year 

2010 claims began. Neither SB/SE nor TEGE adjusted the number of 

examinations once actual claim numbers were known. As a result, the 

percentage of TEGE claims being examined is high, according to a TEGE 

official. Table 1 summarizes the status of IRS’s examinations on the 

credit.

Table 1: Examination Actions for Form 8941 as of February 2012, for Tax Year 2010 

Number of: SB/SEa 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

 

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

Instead, as initial examinations 

Examinations Under Way, 

but IRS Needs to Develop 

a Plan for Efficiently 

Analyzing Results on 

Credit Compliance
 

Page 24 GAO-12-549 Small Employer Health Tax Credit

have closed, IRS officials said that management has spoken with 

examiners about findings related to the credit. This has been possible 

because of the relatively low initial volume of cases, but this approach 

may not be feasible as results accumulate. Therefore, it is not clear how 

IRS can efficiently analyze results to decide whether changes are 

necessary in how it examines the credit or how it educates small 

employers about how to comply with the credit’s rules, and whether it 

committed too many or too few resources to examinations of the credit.

Furthermore, IRS does not have criteria for deciding whether the 

resources spent on examinations of the credit are appropriate, given the 

amount of errors found. IRS officials said that for future years they plan to 

select the number of credit examinations based on past results, identified

compliance risks, and available resources. However, without criteria to 

assess the results in concert with these risks and resources, IRS is less 

able to ensure that examination resources target errors with the credit, 

rather than examining compliant claimants.

For example, early examination results (as of February 2012) show that 

67 percent of the examinations completed were closed without changing 

the credit amount. Examinations without a change burden taxpayers and 

use IRS resources. We recognize that few of the planned examinations 

have been completed and the “no change” percentage could change. 

According to IRS officials, cases resulting in “no change” tend to be the 

first cases closed because they close more quickly than cases requiring a 

change. However, IRS is not using change rate information from prior tax 

credits to determine if examinations for the credit have a “high” no-change 

rate, which could be one indicator to help decide how many examination 

resources to apply to the credit. IRS officials said they do not plan to use 

data from examinations of other tax provisions to benchmark measures—

such as the no-change rate or length of time an examination is open—

because results would not be comparable.

A summary of examination results specific to the credit could also inform 

decisions about using additional compliance tools such as soft notices.49

 

49A soft notice is a letter generated to taxpayers that IRS has identified possible errors on 

the taxpayer’s form. The goal is to increase compliance at minimal costs by educating 

taxpayers for future compliance without doing an examination and minimizing the 

taxpayers’ need to respond to the notice. 

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

Page 25 GAO-12-549 Small Employer Health Tax Credit

without initiating an examination.50 A senior IRS official who is 

implementing the credit said IRS has not ruled out using soft notices, but 

examination results would need to identify an issue that would justify their 

use. He said soft notices are not effective for all taxpayers or situations.

He said IRS would consider using soft notices if officials found a series of 

returns with mistakes from the same tax preparer or promoter of tax 

schemes. Furthermore, soft notices may necessitate follow-up, which 

would negate some of the advantages of the notices. If IRS analysis 

showed that examinations were not a cost-effective way to pursue certain 

errors made in claiming a credit, a soft notice may offer another approach 

to improving compliance with lower costs to IRS and less burden on 

claimants.

There are a variety of research questions that could be of interest to 

policymakers about the effects of the credit that cannot be evaluated with 

data currently available. Figure 5 shows how the credit may influence 

employer behavior and, ultimately, employees.

 

50For example, see GAO, Advance Earned Income Tax Credit: Low Use and Small 

Dollars Paid Impede IRS’s Efforts to Reduce High Noncompliance, GAO-07-1110

(Washington, D.C.: Aug. 10, 2007), and Tax Gap: IRS Could Do More to Promote 

Compliance by Third Parties with Miscellaneous Income Reporting Requirements, 

GAO-09-238 (Washington, D.C.: Jan. 28, 2009).

Data to Evaluate 

Many Questions about 

the Effects of the 

Credit Are Not 

Available 
 

Page 26 GAO-12-549 Small Employer Health Tax Credit

Figure 5: Model of Potential Outcomes and Influential Factors for the Small Employer Health Insurance Tax Credit

Note: Basic model structure is based on University of Wisconsin Extension Program Development 

and Evaluation model, as shown in GAO-12-208G. Content and relationships among variables are 

based on GAO analysis of interviews with subject matter specialists, and literature review.

To answer research questions about the credits potential outcomes 

shown in figure 5, the following are examples of data that might be 

needed:

• number of small, low-wage employers offering health insurance, 

before and after the credit was available;

• number of employees at small, low-wage employers, who have or 

could obtain health insurance through their employers; and

• amount of annual health insurance premium costs for small, low-wage 

employers before and after the credit.

None of these data are readily available or free of limitations, which 

complicates an evaluation. For example, the available data on employersponsored health insurance do not align with the credit’s eligibility criteria, 

according to our interviews with subject matter specialists and our review 
 

Page 27 GAO-12-549 Small Employer Health Tax Credit

of the data (see app. VI for a summary of the data sources), nor could we 

identify a data source that tracks when, and why, employers begin 

offering insurance. As a result of the limitations with all three types of 

data, it would be difficult to precisely measure changes in health 

insurance availability, offering, and costs because of the credit, without 

collecting additional data. Isolating influential factors—such as those 

shown in figure 5—that may contribute to the effects of the credit would 

also be a challenge in an evaluation.51

IRS officials said they will not collect data on credit claimants, outside of 

those collected on Form 8941. IRS’s position on data collection for all 

provisions of the tax code is that it only collects data it needs to ensure 

compliance with the tax laws.52

Collecting additional data needed for policy evaluation would have costs, 

and the magnitude of those costs would depend on the type and amount 

of data needed, which depends on the research questions being asked. 

An additional consideration in thinking about the benefits and costs of 

additional data collection for policy evaluation purposes is the time limits 

on claiming the credit. The current version of the credit runs through the 

end of 2014.53 Policymakers’ conclusions about the questions to be 

answered by any evaluations of the credit’s effects would determine the 

type of data that would need to be collected.

The Small Employer Health Insurance Tax Credit was intended to offer an 

incentive for small, low-wage employers to provide health insurance. 

However, utilization of the credit has been lower than expected, with the 

available evidence suggesting that the design of the credit is a large part 

of the reason why. While the credit could be redesigned, such changes 

 

51For details on methods for identifying causation, including experiments and quasiexperiments, 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. 

52See 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).

53Starting in 2014, eligible small employers can claim the credit for the 2 consecutive 

years beginning when the employer first offers employee health insurance from a state 

exchange.

Conclusions 
 

Page 28 GAO-12-549 Small Employer Health Tax Credit

come with trade-offs. Changing the credit to expand eligibility or make it 

more generous would increase the revenue loss to the federal 

government.

In administering the credit to ensure compliance, IRS employed a number 

of practices that were shown effective for other tax provisions or are 

consistent with IRS strategic objectives. Nevertheless, we identified 

several opportunities for IRS to either improve compliance or perhaps 

reduce the resources it is devoting to ensuring compliance. Without 

additional guidance for examiners on employers with non-U.S. addresses, 

there is a risk of improper credit claims being allowed. Without more 

systematic attention to early examination results, IRS could lock itself into 

devoting more scarce resources than needed to examinations.

To help ensure thoroughness and consistency of examinations on the 

credit, we recommend that the Commissioner of Internal Revenue take 

the following two actions:

1. Revise the SB/SE and TEGE examination instructions to include 

instructions for examiners on how to confirm eligibility for the credit for 

small employers with non-U.S. addresses.

2. Revise the TEGE examination guidance to include more detailed 

instructions for examiners on how to confirm that claimants properly 

calculated eligible health insurance premiums paid for purposes of the 

credit. The SB/SE examination instructions could serve as a model.

To help ensure that IRS uses its examination resources efficiently, we 

recommend that the Commissioner of Internal Revenue take the following 

two actions:

3. Document and analyze the results of examinations involving the credit 

to identify how much of those results are related to the credit versus 

other tax issues being examined, what errors are being made in 

claiming the credit, and when the examinations of the credit are worth 

the resource investment.

4. Related to the above analysis of examination results on the credit, 

identify the types of errors with the credit that could be addressed with 

alternative approaches, such as soft notices.

Recommendations for 

Executive Action
 

Page 29 GAO-12-549 Small Employer Health Tax Credit

In an April 30, 2012, letter responding to a draft of this report (which is 

reprinted in app. VII), the IRS Deputy Commissioner for Services and 

Enforcement provided comments on our findings and recommendations 

as well as information on additional agency efforts related to 

implementing the Small Employer Health Insurance Tax Credit in PPACA. 

IRS generally agreed with all four of our recommendations. Regarding our 

recommendation on examination instructions related to small employers 

with non-U.S. addresses, IRS stated that SB/SE will provide additional 

guidance in its instructions and that TEGE has added guidance to its 

instructions. On May 1, 2012, IRS provided a copy of the TEGE

instructions, which we are reviewing. On our recommendation on revising 

TEGE’s examination guidance, IRS’s letter said that on April 13, 2012,

TEGE implemented more detailed instructions in its examination 

guidance related to confirming proper calculations of eligible health 

insurance premiums paid for purposes of the credit. These instructions 

were also included in the TEGE document provided on May 1, 2012.

With regard to analyzing credit examination results to identify compliance 

issues specific to the credit, IRS said it regularly analyzes audit results to 

determine whether resources are expended efficiently, though its

information systems do not currently capture adjustments by issue, such 

as this tax credit. IRS agreed to leverage existing information systems 

and, as appropriate, to allocate resources to manually analyze 

examination results. IRS said this will include, as feasible, identifying the 

types and amounts of errors related to the credit. We reiterate the benefit 

of documenting and analyzing the results of examinations involving the 

credit. If it does not do so, IRS will not have information for determining 

whether examinations of the credit are worth the resource investment.

Regarding our fourth recommendation on using examination results to 

determine whether alternative compliance approaches, such as soft 

notices, could help address errors with the credit, IRS agreed to continue 

to review its compliance efforts to determine whether soft notices would 

be appropriate.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Chairmen and 

Ranking Members of other Senate and House committees and 

subcommittees that have appropriation, authorization, and oversight 

responsibilities for IRS. We will also send copies to the Commissioner of 

Internal Revenue, the Secretary of the Treasury, the Chairman of the IRS 

Agency Comments 

and Our Evaluation
 

Page 30 GAO-12-549 Small Employer Health Tax Credit

Oversight Board, and the Director of the Office of Management and 

Budget. In addition, the report will be available at no charge on the GAO 

website at http://www.gao.gov.

If you or your staff have any questions or about this report, please contact 

me at (202) 512-9110 or at 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 
Appendix I: Scope and Methodology

Page 31 GAO-12-549 Small Employer Health Tax Credit

To assess the extent to which the Small Employer Health Insurance Tax 

Credit (referred to in this report as the credit) is being claimed, we 

obtained and analyzed Internal Revenue Service (IRS) data on the claims 

on Form 8941 for tax year 2010. We interviewed responsible IRS staff 

and examined background materials. IRS provided a report from the 

Form 8941 data and we reviewed the programming code that created that 

report. We corroborated the results of this IRS report with a Treasury 

Inspector General for Tax Administration (TIGTA) report published in 

November and found similarities.1

To identify any factors limiting credit claims, we interviewed groups 

representing employers, tax preparers and insurance brokers and to 

assess how these factors could be addressed, we analyzed our interview 

results as well as relevant documents. Specifically, we spoke with 

representatives of the National Federation of Independent Businesses, 

the National Council of Nonprofits, the Small Business Majority, the U.S. 

Chamber of Commerce, the American Institute of Certified Public 

Accountants, America’s Health Insurance Plans, the National Society of 

Accountants, the National Association of Enrolled Agents, and the 

National Association of Health Underwriters. We worked with some of 

these groups to assemble discussion groups with tax preparers, health 

insurance brokers, and employers to discuss potential factors and ways 

to address them. Discussion groups were, for the most part, telephone 

conferences. We also spoke with insurance and tax preparation 

companies, specifically, BlueCross Blue Shield of Kansas City, 

Independent Health of New York, H&R Block’s Tax Institute, and Jackson 

Hewitt Tax Service. We used qualitative analysis software to do a content 

analysis of the interviews and discussion group comments. 

 The data were found to be sufficiently 

reliable for our purposes. We identified estimates of employers that were 

potentially eligible to claim the credit by reviewing reports and websites of 

government agencies, think tanks, and interest groups. When possible, 

we interviewed officials from the government agencies and business 

groups that developed estimates. 

To provide additional support for discussion group and interview findings 

we reviewed documents and, where possible, we identified data from 

IRS, the 2010 Medical Expenditure Panel Survey, or the 2011 Kaiser 

 

1

TIGTA, Affordable Care Act: Efforts to Implement the Small Business Health Care Tax 

Credit Were Mostly Successful, but Some Improvements Are Needed, 2011-40-103 

(Washington, D.C.: Sept. 19, 2011). 

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 32 GAO-12-549 Small Employer Health Tax Credit

Family Foundation Health Benefits Survey. At IRS, we interviewed 

officials from the Small Business/Self-Employed Division (SB/SE), 

including officials in the Communications and Liaison Office; the Tax 

Exempt and Government Entities Division (TEGE); the Research and 

Analysis for Tax Administration division, and the Taxpayer Advocacy 

Service.

To assess how fully IRS is ensuring that the tax credit is correctly claimed 

by eligible employers, we reviewed IRS’s compliance plan and filters and 

instructions for IRS staff conducting examinations, and compared these 

documents with compliance practices used for prior tax provisions and 

found in IRS strategic objectives.2

To assess what would be needed to evaluate the effects of credit, we 

conducted a literature review and interviewed representatives of the 

forenamed groups and subject matter specialists from government, 

academia, research foundations and think tanks. We selected the 

specialists based primarily on our literature review and spoke with 

individuals at the University of Massachusetts, Boston; Massachusetts 

Institute of Technology; the Commonwealth Fund; the Urban Institute; the 

Kaiser Family Foundation; the American Enterprise Institute; the 

Employee Benefit Research Institute; the RAND Corporation; the Small 

Business Administration Office of Advocacy; and the Office of Tax Policy 

at the Department of the Treasury. We reviewed available data in 

commonly cited surveys with questions on employer health insurance, 

and identified how the questions and variables match to the eligibility 

criteria for the credit.

We also highlighted any gaps between 

filters and examination instructions and the credit’s eligibility rules. We 

reviewed the filter results for tax year 2010 claims and interviewed SB/SE 

and TEGE officials about compliance efforts.

We conducted this performance audit from July 2011 through May 2012 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

 

2

For example, see GAO, Tax Refunds: Enhanced Prerefund Compliance Checks Could 

Yield Significant Benefits, GAO-11-691T (Washington, D.C.: May 25, 2011). 
Appendix I: Scope and Methodology

Page 33 GAO-12-549 Small Employer Health Tax Credit

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: State Average Premiums for Small 

Group Markets for 2010 and 2011

Page 34 GAO-12-549 Small Employer Health Tax Credit

The Small Employer Health Insurance Tax Credit is based on a 

percentage of the lesser of (1) the premiums paid by the eligible small 

employer for employees during the taxable year and (2) the amount of 

premiums the employer would have paid if each employee were enrolled 

in a plan with a premium equal to the average premium for the small 

group market in the state (or in an area in the state) in which the 

employer is offering health insurance. The Secretary of Health and 

Human Services determines whether separate average premiums will 

apply for areas within a state and also determines the average premium 

for a state or substate area. Table 2 shows the average premiums for the 

small group market in each state for tax years 2010 and 2011.

Table 2: State Average Premiums for Small Group Markets for 2010 and 2011

2010 2011

Employee only

(single plan) Family plan

Employee only

(single plan) Family plan

Alabama $4,441 $11,275 $4,778 $12,084

Alaska 6,204 13,723 6,729 14,701

Arizona 4,495 10,239 4,614 11,063

Arkansas 4,329 9,677 4,378 9,849

California 4,628 10,957 4,790 11,493

Colorado 4,972 11,437 5,007 12,258

Connecticut 5,419 13,484 5,640 14,096

Delaware 5,602 12,513 5,902 13,411

District of Columbia 5,355 12,823 5,721 14,024

Florida 5,161 12,453 5,218 12,550

Georgia 4,612 10,598 5,085 11,440

Hawaii 4,228 10,508 4,622 11,529

Idaho 4,215 9,365 4,379 10,066

Illinois 5,198 12,309 5,565 13,176

Indiana 4,775 11,222 5,262 12,097

Iowa 4,652 10,503 4,694 11,051

Kansas 4,603 11,462 4,693 11,909

Kentucky 4,287 10,434 4,456 10,560

Louisiana 4,829 11,074 5,143 11,911

Maine 5,215 11,887 5,261 12,255

Maryland 4,837 11,939 5,073 12,530

Massachusetts 5,700 14,138 5,900 15,262

Michigan 5,098 12,364 5,195 12,539

Appendix II: State Average Premiums for 

Small Group Markets for 2010 and 2011
Appendix II: State Average Premiums for Small 

Group Markets for 2010 and 2011

Page 35 GAO-12-549 Small Employer Health Tax Credit

2010 2011

Employee only

(single plan) Family plan

Employee only

(single plan) Family plan

Minnesota 4,704 11,938 5,048 12,790

Mississippi 4,533 10,501 4,787 10,860

Missouri 4,663 10,681 4,843 11,379

Montana 4,772 10,212 4,923 10,789

Nebraska 4,715 11,169 5,130 12,057

Nevada 4,553 10,297 4,781 10,836

New Hampshire 5,519 13,624 5,858 14,523

New Jersey 5,607 13,521 5,868 14,093

New Mexico 4,754 11,404 5,146 12,328

New York 5,442 12,867 5,589 13,631

North Carolina 4,920 11,583 5,136 11,949

North Dakota 4,469 10,506 4,545 11,328

Ohio 4,667 11,293 4,706 11,627

Oklahoma 4,838 11,002 4,922 11,200

Oregon 4,681 10,890 4,881 11,536

Pennsylvania 5,039 12,471 5,186 12,671

Rhode Island 5,887 13,786 5,956 14,553

South Carolina 4,899 11,780 5,036 11,780

South Dakota 4,497 11,483 4,733 11,589

Tennessee 4,611 10,369 4,744 11,035

Texas 5,140 11,972 5,172 12,432

Utah 4,238 10,935 4,532 11,346

Vermont 5,244 11,748 5,426 12,505

Virginia 4,890 11,338 5,060 12,213

Washington 4,543 10,725 4,776 11,151

West Virginia 4,986 11,611 5,356 12,724

Wisconsin 5,222 12,819 5,284 13,911

Wyoming 5,266 12,163 5,430 12,867

Source: Department of Health and Human Services and IRS information.
Appendix III: Adjustments in Counting Total 

Small Employer Claims and Total Credit 

Amount Claims for Tax Year 2010

Page 36 GAO-12-549 Small Employer Health Tax Credit

Internal Revenue Service (IRS) data for tax year 2010 show 335,600 total 

claims filed. This total must be adjusted to avoid counting the 110,800 S 

corporation and partnership claims that were passed through to 165,300 

respective shareholders and partners who then filed their claims 

separately. Excluding the 165,300 shareholder and partner claims filed 

leaves 170,300 small employer claims filed. To capture the number of 

credit amounts claimed and avoid the amounts that were claimed by the 

S corporations and partnerships as well as their respective shareholders 

and partners, we excluded the 110,800 S corporation and partnership 

claims to arrive at 224,800 credit amounts claimed. (See fig. 6.)

Figure 6: Number of Credit Claims by Taxpayer Type, Tax Year 2010

Note: Numbers rounded to the nearest hundred.

a

Also included in this group are single member owners of disregarded limited liability corporations.

Appendix III: Adjustments in Counting Total 

Small Employer Claims and Total Credit 

Amount Claims for Tax Year 2010
Appendix IV: Credit Claims by Employer Size 

and Wages Paid, Tax Year 2010

Page 37 GAO-12-549 Small Employer Health Tax Credit

Appendix IV: Credit Claims by Employer Size 

and Wages Paid, Tax Year 2010
Appendix V: Form 8941 and Worksheets for 

Claiming the Small Employer Health Insurance 

Tax Credit

Page 38 GAO-12-549 Small Employer Health Tax Credit

This appendix contains the noninteractive Form 8941 and worksheets, 

shown in figure 4 in the letter. 

Appendix V: Form 8941 and Worksheets for 

Claiming the Small Employer Health 

Insurance Tax Credit
Appendix V: Form 8941 and Worksheets for 

Claiming the Small Employer Health Insurance 

Tax Credit

Page 39 GAO-12-549 Small Employer Health Tax Credit
Appendix V: Form 8941 and Worksheets for 

Claiming the Small Employer Health Insurance 

Tax Credit

Page 40 GAO-12-549 Small Employer Health Tax Credit
Appendix VI: Publically Available Data on 

Small Employer Health Insurance

Page 41 GAO-12-549 Small Employer Health Tax Credit

Through our literature review and interviews, we identified several 

commonly cited non-Internal Revenue Service data sources on employer 

health insurance. Each source has different variables related to the key 

eligibility requirements for the Small Employer Health Insurance Tax 

Credit. Table 3 summarizes each source, its basic methodology, and 

whether its data matches with these requirements for the credit. The table 

only considers data that are readily accessible in public-use data sets. 

Table 3: Publically Available Data on Small Employer Health Insurance 

Employer Health Benefits Survey 

Medical Expenditure Panel 

Survey (Insurance Component)

National Compensation 

Survey

Sources and methodology

Organizations responsible for 

the survey

Kaiser Family Foundation and 

Health Research and Educational 

Trust

Department of Health and Human 

Services, Agency for Healthcare 

Research and Quality

Bureau of Labor Statistics

Frequency and contact 

method

Annual, conducted by phone Annual, generally conducted by 

phone or mail

Annual, conducted by 

personal visits, mail, 

telephone, and e-mail

Unit of analysis, sample size 

and source

Employers—2,088 from Dun and 

Bradstreet and the Census of 

Governments

Employersa—38,409 private sector Employers;

establishments from U.S. Census 

Bureau’s Business Register

b

Response rate and most 

recent data, as of April 2012

15,566 

private industry 

establishments from state 

unemployment insurance 

reports

Forth-seven percent in 2011 Eighty-three percent for private 

establishments in 2010

Fifty-six percent for private 

industry in 2011

Key eligibility requirement for the credit, and whether the source contains data

Employer is a for-profit or taxexempt entityYes Yes Yes

Employer offers health 

insurance and pays at least 

50 percent of premiums

c

Yes Yes Yes

Employer has fewer than 25 

full-time equivalents (FTE)

No—number of employees No—number of employees No—number of 

employees, from 1 to 49, 

and number of full- and 

part-time employees

Average annual wages are 

less than $50,000 per FTE

No—percentage of full-time 

employees who make $23,000 or 

less per year

No—percentage of employees who 

earned wages in one of three 

categories

No—wages are presented 

in five percentiles d

Source: GAO analysis of data sources.

e

a

The Medical Expenditure Panel Survey’s Insurance Component sample is drawn at the 

establishment level; an establishment is a particular workplace or location.

b

The National Compensation Survey sample is drawn at the establishment level; an establishment is 

a single economic unit that engages in one, or primarily one, type of economic activity. It is usually a 

single physical location.

c

Appendix VI: Publically Available Data on 

Small Employer Health Insurance

Statistical models used by the National Compensation Survey are able to control for profit/non-profit 

status.
Appendix VI: Publically Available Data on 

Small Employer Health Insurance

Page 42 GAO-12-549 Small Employer Health Tax Credit

d

The annual wage categories are about (1) $23,920 or less, (2)$23,920 to $54,080, and (3) $54,080 

or more.

e

Wage data are presented in percentile categories in the published data. The annual wage 

categories, for private industry workers, are about: (1) 10th percentile makes $17,160 or less, (2) 25th 

percentile makes $22,235 or less, (3) 50th percentile makes $33,009 or less, (4) 75th percentile 

makes $51,605 or less, and (5) the 90th percentile makes $78,811 or less.
Appendix VII: Comments from the Internal 

Revenue Service

Page 43 GAO-12-549 Small Employer Health Tax Credit

Appendix VII: Comments from the Internal 

Revenue Service
Appendix VII: Comments from the Internal 

Revenue Service

Page 44 GAO-12-549 Small Employer Health Tax Credit
Appendix VII: Comments from the Internal 

Revenue Service

Page 45 GAO-12-549 Small Employer Health Tax Credit
Appendix VIII: GAO Contact and Staff 

Acknowledgments

Page 46 GAO-12-549 Small Employer Health Tax Credit

James R. White, (202) 512-9110 or whitej@gao.gov

In addition to the contact named above, Thomas Short, Assistant 

Director; Susan Baker; Amy Bowser; Ellen Grady; George Guttman; 

Donna Miller, Ruben Montes de Oca, Edward Nannenhorn; Robert 

Gebhart; Crystal Robinson; Cynthia Saunders; and Lindsay Swenson 

made key contributions to this report.

Appendix VIII: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(450922)
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