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76–181 2011

SMALL BUSINESS 

HEALTH INSURANCE TAX CREDIT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

NOVEMBER 15, 2011 

Serial No. 112–OS8 

Printed for the use of the Committee on Ways and Means 

( 


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SUBCOMMITTEE ON OVERSIGHT 

CHARLES W. BOUSTANY, JR., Louisiana, Chairman 

DIANE BLACK, Tennessee 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

KENNY MARCHANT, Texas 

TOM REED, New York 

ERIK PAULSEN, Minnesota 

JOHN LEWIS, Georgia, Ranking 

XAVIER BECERRA, California 

RON KIND, Wisconsin 

JIM MCDERMOTT, Washington 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Page 

Advisory of November 15, 2011, announcing the hearing .................................... 2 

WITNESSES 

Honorable J. Russell George, Inspector General, Treasury Inspector General 

for Tax Administration ........................................................................................ 5 

Sarah Hall Ingram, Commissioner of the Tax Exempt/Government Entities 

Operating Division, Internal Revenue Service .................................................. 22 

Patricia Thompson, Chair, AICPA Tax Executive Committee, American Institute of Certified Public Accountants ................................................................... 49 

Todd McCracken, President, National Small Business Association .................... 58 

Matthew Hisel, Co-Director, Home Resource ........................................................ 71 

SUBMISSIONS FOR THE RECORD 

National Association of Professional Employer Organizations, statement ......... 96 

National Federation of Independent Business, statement ................................... 98 

Small Business Majority, statement ...................................................................... 101 

The Center for Fiscal Equity, statement ............................................................... 108 


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SMALL BUSINESS 

HEALTH INSURANCE TAX CREDIT 

TUESDAY, NOVEMBER 15, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:33 a.m., in 

Room 1100, Longworth House Office Building, Hon. Charles 

Boustany [Chairman of the Subcommittee] presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

Tuesday, November 15, 2011 

OS–8 

Chairman Boustany Announces a Hearing on 

Small Business Health Insurance Tax Credit 

Congressman Charles W. Boustany, Jr., MD, (R–LA), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, today announced the 

Subcommittee will hold a hearing on the Small Business Health Insurance Tax 

Credit created by the Patient Protection and Affordable Care Act. The hearing will 

take place on Tuesday, November 15, 2011, in Room 1100 of the Longworth 

House Office Building, beginning at 10:30 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

The Patient Protection and Affordable Care Act (Pub. L. No. 111–148) (PPACA) 

included a limited-time tax credit to encourage small businesses to provide health 

care coverage to employees. The Small Business Health Insurance Tax Credit (Small 

Business Tax Credit) is available to certain small businesses and covers some of the 

cost of employee health insurance. 

The Small Business Tax Credit covers 35 percent of an eligible small employer’s 

contribution to employee health insurance premiums for each tax year from 2010 

to 2013. After 2013, the credit amount increases to 50 percent, but a taxpayer may 

only elect to take the credit for two consecutive tax years. The calculation to determine eligibility is a complex sliding scale involving employee hours of service and 

wages, along with certain exclusions. 

As the costs of health insurance continue to rise, it remains unclear whether the 

Small Business Tax Credit is beneficial to a meaningful number of small businesses 

or whether the Internal Revenue Service (IRS) is administering the credit appropriately. Due to the complex calculations associated with the Small Business Tax 

Credit, government watchdogs have warned that it leaves room for calculation error 

and opens the door to potential tax fraud. A recent report by the Treasury Inspector 

General for Tax Administration found that only 228,000 taxpayers took advantage 

of the credit as of May 2011, despite earlier claims by the Administration that four 

million employers would be eligible. The Inspector General also found that the manner in which the IRS is administering the credit has created concerns over tax compliance. 

In announcing the hearing, Chairman Boustany said, ‘‘Much of the President’s 

new health care law will be administered by the IRS, and this is the first 

credit provision to come into effect. With small businesses hurting from a 

stalled economy and rising health insurance premiums, the Oversight Subcommittee will explore whether the Small Business Tax Credit is providing 

meaningful help to employers or if it is opening the door to more improper 

payments.’’ 


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FOCUS OF THE HEARING: 

The hearing will focus on whether small business employers are currently benefiting from the Small Business Tax Credit, problems they may be encountering 

when calculating the credit, and whether the IRS is administering it in a way that 

ensures tax compliance. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you 

would like to submit, and click on the link entitled, ‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance 

with the formatting requirements listed below, by the close of business on Tuesday, November 29, 2011. Finally, please note that due to the change in House 

mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House 

Office Buildings. For questions, or if you encounter technical problems, please call 

(202) 225–1721 or (202) 225–3625. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://www.waysandmeans.house.gov

f 

/. 

Chairman BOUSTANY. The Subcommittee will come to order. 

Good morning, and welcome to this morning’s hearing on the implementation and effectiveness of the small business health insurance tax credit. 

Small businesses are the backbone of our economy. They account 

for more than half of America’s private gross domestic product, and 

employ about half of its private-sector workforce. 

As our economy struggles to recover from the worst downturn 

since the Great Depression small businesses are bearing the brunt 


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of the pain. Consumer demand is down, costs are rising, and too 

often Washington exacerbates the problem through new regulations, higher taxes, and burdensome red tape. 

As a former small business owner running a small medical practice in Louisiana, I certainly know the challenges facing small businesses across this country. And so I take special interest in the 

subject of today’s hearing, because I know small business owners 

need real help when it comes to the rising cost of health care. 

The problem is worse today than ever before. The cost of premiums for family policies have gone up by an average of 9 percent 

in the past year, and I’ve heard complaints of premiums for small 

businesses going up by as much as 43 percent. A recent survey by 

the National Small Business Association found that 32 percent of 

small business owners have held off on hiring new employees, due 

to rising health care costs. 

Today we’re here to consider how the small business health insurance tax credit has been implemented, whether it is effective in 

reducing health care costs for employers. When it was enacted as 

part of the President’s health care overhaul, supporters said the 

credit would provide access to affordable insurance, and help small 

employers insure their employees. 

Two years later, we see that the results do not match up to the 

promises. Instead, it is a convoluted tax credit that temporarily 

subsidizes the cost of employee health insurance in a very small 

number of cases. Employers must undertake complicated calculations to determine whether they even qualify for the credit. 

The instructions to the form are eight pages long and somewhat 

complex. And, in fact, we have a chart—and I don’t know—we have 

a chart on the screen here. This chart shows the complex analysis 

an employer has to undertake before knowing whether they can 

claim the credit, or how much it’s worth. If employers are able to 

navigate the calculations and confirm they are eligible, they must 

limit additional hiring and employee compensation in order to keep 

it, oftentimes. 

Although the credit does not appear to be providing meaningful 

assistance to small business owners, it is still the IRS’s job to implement it, and to do so in a way that protects taxpayer dollars 

from erroneous payments. So, we are here today to discuss two critical issues. Is the IRS administering the small business health insurance tax credit in a way that reduces the risk of erroneous payments and provides necessary information to taxpayers? And two, 

why is the credit then ineffective in helping many small employers 

reduce the cost of health insurance, or incentivizing employers not 

previously offering insurance to begin doing so? 

These are important questions, and I look forward to today’s discussion. And I want to thank both of our witnesses for joining us 

here this morning. 

Before I yield to Ranking Member Lewis, I ask unanimous consent that all Members’ written statements be included in the 

record. 

[No response.] 

Chairman BOUSTANY. And without objection, so ordered. Now 

I yield to the Ranking Member, Mr. Lewis. 


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Mr. LEWIS. Thank you, Mr. Chairman. Mr. Chairman, I want to 

thank you for holding this hearing on the small business health 

care tax credit. In these tough economic times, many Americans 

fear they are just one medical emergency away from losing their 

home, their businesses, or their savings. This tax credit is designed 

as a temporary measure to help small employers afford health insurance for their employees. It is the bridge to broader reforms 

that will help small businesses purchase affordable, high-quality 

health insurance in 2014. 

To date, more than 300,000 small businesses have claimed and 

benefited from over $400 million in tax credits to help them provide 

health insurance to employees. Still, some question whether the 

credit is meaningful. Maybe I should repeat this. Still, some question whether the credit is meaningful. 

It would be a mistake to draw conclusions from the early claim 

number currently available. Many small businesses request extensions and file their tax returns in September and October. Returns 

receive in October are still being processed. And, the agency does 

not expect to finish processing these returns until December of the 

end of this year. It is simply too early to tell how many businesses 

will claim the credit. 

Finally, we must also remember that any serious discussion of 

the administration of tax credits must begin with fully funding the 

IRS. 

Today’s hearing provides a real-time example of how the $600 

million in budget cuts proposed by the House Republicans may affect small businesses and employees. The Inspector General’s report states that the agency needs about $24 million to administer 

this credit next year. 

I want to thank the witnesses for being here today, and look forward to hearing from each of you. As we have successfully done in 

the past, I would like to work with the Inspector General to provide 

the agency with any additional authority it needs to administer 

this tax credit. 

Mr. Chairman, again I want to thank you, sir. 

Chairman BOUSTANY. I thank the Ranking Member for his 

opening statement. And now I want to welcome our first panel of 

witnesses. 

We have Mr. Russell George, who is Treasury inspector general 

for tax administration, and Ms. Sarah Hall Ingram, who is commissioner of the tax exempt and government entities operating division 

of the Internal Revenue Service. I want to thank you both for being 

here today, and to provide your testimony. You will each have the 

customary 5 minutes to present your testimony with your full written statement submitted for the record. 

And, Mr. George, we will begin with you. 

STATEMENT OF HONORABLE J. RUSSELL GEORGE, INSPECTOR GENERAL, TREASURY INSPECTOR GENERAL FOR TAX 

ADMINISTRATION, WASHINGTON, DC 

Mr. GEORGE. Thank you, Mr. Chairman, Chairman Boustany, 

Ranking Member Lewis, Members of the Subcommittee. Thank you 

for the opportunity to testify on the Internal Revenue Service’s implementation of the Small Business Health Care Tax Credit. 


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The Patient Protection and Affordable Care Act amended the Internal Revenue Code to provide the credit. As noted, the credit was 

designed to encourage small employers and certain tax-exempt organizations to offer health care insurance and receive a credit for 

the employee health insurance expenses that they have incurred. 

It took effect January 1, 2010. The Congressional Budget Office estimated the credit would cost $37 billion over 10 years. 

As it pertains to which taxpayers qualify for the credit and how 

to calculate the credit amount, the law is very complex. To address 

this, the Internal Revenue Service issued two Notices which set 

forth detailed guidance on claiming the credit, copies of which are 

included in my written testimony. 

There are multiple steps to calculate the credit and seven worksheets that must be completed in order to claim it. These worksheets are required to determine the correct amounts to enter on 

8 of the 25 lines on IRS Form 8941, which is the form used to claim 

the credit. 

Despite IRS efforts to inform over four million taxpayers who 

could potentially qualify for the credit, the volume of claims for the 

credit has been low. Through mid-October 2011, the IRS reported 

that just over 300,000 taxpayers, including tax-exempt taxpayers, 

had claimed the credit for a total amount of $416 million. This is 

substantially lower than the Congressional Budget Office estimate, 

that taxpayers would claim up to $2 billion of credits for Tax Year 

2010. 

There is a risk of errors occurring when the credit is claimed or 

processed. The credit is new, and both taxpayers, as well as IRS 

employees, will need to educate themselves with the procedures for 

claiming the credit. Our review found that the complexity of the 

rules make them difficult for taxpayers to follow. The IRS also had 

to complete new computer systems’ programming to update the 

new Form 8941 and identify potential compliance risks. 

While the credit is specifically targeted to small business employers, some taxpayers may claim it even when they have not filed required employment tax returns. A lack of employment tax returns 

could indicate an erroneous claim and that the taxpayer is not an 

employer. However, it could also mean that the taxpayer is using 

the services of a professional employer organization, also known as 

a ‘‘PEO.’’ 

PEOs, acting as the employer, file employment tax returns under 

their own Employer Identification Number, and the client businesses where the employees work, claim other employment-related 

expenses, and the related deductions and credits that they paid. 

This presents a challenge to the IRS to determine whether a company which does not file employment tax returns qualifies for the 

credit without corresponding with or auditing the company. 

We identified the issues by tracking the relationships between 

the PEOs and client companies in a previous review. In that report, 

TIGTA recommended that the IRS work with the Department of 

the Treasury to explore all options, including the use of the revised 

Form 2678, which is the Employer/Payer Appointment of Agent 

Form, to document the relationship between PEOs and their clients. The IRS agreed to establish such links between PEOs and 

their clients. However, their efforts were not successful. 


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To administer employment tax laws and to effectively use scarce 

compliance resources, the IRS needs to be able to identify businesses that begin using the services of a PEO, as well as when they 

terminate those services. Without this ability—which, again, the 

service does not possess—the IRS may not take appropriate actions 

against the businesses that do not pay employment taxes or improperly claim credits. 

Some errors and omissions made by taxpayers when claiming the 

credit were not identified by the IRS. Early in 2011 filing season, 

TIGTA auditors evaluated whether tax returns with errors were 

identified by the IRS. The types of errors we identified included errors in calculating Full-Time Equivalent employees, incorrect application of percentage allowances or phase-out rules, missing Form 

3800, among others. The IRS was not identifying these errors, but 

has stated to us they are taking steps to address this as a result 

of our report. 

Some errors that the taxpayers made could be addressed with 

the IRS’s existing authority to correct mathematical and clerical errors, which is known as ‘‘math error authority.’’ However, the lack 

of authority for other types of errors could hamper the IRS’s compliance efforts. This authority could allow the IRS to stop credit 

amounts claimed by taxpayers who do not appear to be qualified 

for these credits. 

Chairman Boustany, Ranking Member Lewis, Members of the 

Subcommittee, thank you for the opportunity to provide TIGTA’s 

assessment of the IRS’s administration of the Small Business 

Health Care Tax Credit. 

[The prepared statement of Mr. George follows:] 


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HEARING BEFORE THE 

COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

U.S. HOUSE OF REPRESENTATIVES 

"Implementation and Effectiveness of the Small 

Business Health Care Tax Credit" 

November 15, 2011 

Washington, DC 

Statement of 

The Honorable J. Russell George 

Treasury Inspector General for Tax Administration 
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TESTIMONY OF 

THE HONORABLE J. RUSSELL GEORGE 

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION 

before Ihe 

COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

U,S. HOUSE OF REPRESENTATIVES 

"Implementation and Effectiveness of Ihe 

Small Business Health Care Tax Credit" 

November IS, 201 1 

Chairman Boostany, Ranking Member lewis, and Members of the 

Subcommittee, I thank you for the opportunity to testify on the Small Business 

Health Care Tax Credit (Credit). My comments will focus on the TreasurY 

Inspector General for Tax Admlnlstration·s (TIGTA) oversight of the Internal 

Revenue Service's (IRS) efforts to implement the Credit and on 

recommendations we have made to improve the implementation. 

Background on the Small Business Health Care Tax Credit 

The Palient Protectlon and Affordable Care Act' amended the tnternal 

Revenue Code to provide the Credit. This is a new business credit for employee 

health insurance expenses of small businesses and certain tax-e)(empt 

organizations. It Is effecti .... e for ta)( years beginning after December 31, 2009. 

The Congressional Budget Office estimated the Credit would cost $37 billion over 

10 years. 

In general, the Credit is available only to small employers who pay at leasl 

one-half the cost of health insurance coverage lor their employees. Similar to 

other small employers. small !alf-e)(empt organizations described in Internal 

Revenue Code section 501 (c) and e)(empt from ta)( under section 501(a) may 

also qualify for the CredIt. When claimed on individual or business returns, the 

Credit is nonrefundable (i.e., only available to offset aclua.llax liabiHty). The 

Credit is refundable to tax-e)(empt organizations. but only to the extent it does not 

exceed the total amount of income ta)( and Medicare tax withholding from 

employees· wages and the employer share of Medicare lax. Employers will 

continue to be able 10 deducllhe cosls in excess of the Credit amounl as an 

ordinary expense for employee compensation. A credit is normally preferred to a 

deduction because il reduces la)( due dollar-for-dollar, as opposed 10 a 

deduction, whJch decreases ta)(able income. 

' !'Ilb. L No. 111_1.8, 12. Slat 119, Section 1.21 (2010) 
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The law concerning whicil taxpayers qualify' for the Credit and how 10 

calculate Ihe Credit amount is complex. To address Ihis, the Inlernal Revenue 

Service issued Notice 2010-44 and Notice 2010·82, which set forth detailed 

guidance on claiming the Credit. The IRS notIces contain the following 

information: 

To quaury lor the Credft, an employer must have the followIng characterisllcs; 

• Have fewer than 25 full·time equivalents (FTE)' for the laxable year. 

• Have average annual wages for its employees for the year less than 

$50,000 per FTE. 

• Maintain a 'qualifying arrangement.'" 

Not be an agency or instrumentality of Federal, Stale, local, or Indian 

Tribal Governments. 

• 'f a tax-exempt organizatlon. be described in Internal Revenue Code 

section 501 {c) and be exempt from tax under section 501 (a). Tax·exempt 

entities do not qualify if these seclions do nol apply. 

In brief, an employer must follow Ihese steps to determine eligibility for Ihe 

Credit 

• Determine the employees w]1o are laken inlo accounl for purposes of Ihe 

Credit 

• Determine the number of hours of service performed by Ihose employees. 

• Calculate the number of the employer's FTEs. 

• Determine the average annual wages paid per FTE. 

• Determine the premiUms paid by Ihe employer that are taken into account 

for purposes of the Credit. The premiums must be paid by an employer 

under a qualifying arrangement and must be paid for health insurance Ihal 

meets requirements related to the Credit. 

There are multiple steps to calculate Ihe Credit. and seven worksheets 

must be completed in association with claiming Ihe Credit' These worKsheets 

are required to determine the correct amounts to enter on 8 of the 25 lines on 

; REs. as defined by the legislal>On. means a number of employees equal to the numl)er 

determ\ne1l by di .... ding 1M total number of hours 01 Urv1ce for whoch wages were paod by the 

employer to employees during tn e taxable year by 2.080. Additional guidance on fTEs is also 

rOVided In the legislation and in IRS Notice 2010-44. 

An arrangement under which the emplOyer pays premiums lor eacn employee enrolled In nea~ 

insurance coverage offered by the employer in an amount equal to a uniform percentage (flOt less 

than 50 percent) of the premium 00$1 of the c;oVeraglil . 

• Tne work~heel~;ore contillned in Ihe in$tructiQns for CrerJ;/1or Smlllt Emplof!lr Mellltll 1(I~u",~ 

Premiums(Form 8941). See Appendix I for a copy 01 the Form 8g41 showing Ihe stepr; thllt mU&t 

be reported Appendix III conlalnii a more detailed summary offactors thaI must be CO'lI;idered in 

determining eligibil~y for the Credit 

2 
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Form 8941 . For example: the number of employees, the [lumber ofFTEs, the 

average annual wages paid, the premiums paid, and the calculation of the 

reduced Credit amount for businesses wl{h over 10 FTEs and average annual 

wages over $25.000. In general. the steps include: 

Calculate the m,l)(imum amount of the Credit, 

• Reduce the maximum Credit in slep one in accordance with the phase-out 

rule. if necessary.' 

For employers receiving a State credit or subsidy for health insurance, 

determine Ihe employer's actual premium pa~menl. 

After eligibility is established and Form 8941 is completed to determine the 

Credit amount, the amount is transferred to another form or forms, In the case of 

mosl businesses and individuals, the Credit is reported as part of Ihe General 

Business Credit (Form 3800) and then transferred again (to the eXlent allowed) 

to the U.S. Corporation Income Tax ReMn (Form 1120) or U.S. Individual 

Income Tax Return (Form 1040). Partnerships and 5 corporationsS' report the 

Credit as part of Schedule K on the U.S. Return of Partnership Income (Form 

1065) 01 the U.S. Income Tax Relum for an S Corporation (Form 1120$). 

Estates and trusts report the Credit as part of Schedule K on Ihe U.S. Income 

Tax Return lor Estates and Trusts (Form 1041 ). Tax-exempt organizations 

report the Credit on Ihe Exempt Organization Business Income Tax Return (Form 

990-T). 

Extensive Efforts Were Made to Implemenllhe Credit 

The IRS completed extensive efforts to implement the Credi1 and other 

Affordable Care Act provisions. Shortly after the legislation was passed. the IRS 

began assessing what it would need to do to implement the Credit and tracked 

these efforts as they were completed. According to the IRS, it has completed 

more than 1,000 outreach and educational actions, including communication 

efforts to inform taxpayers and ta~ professionals about the Credit. The tRS 

mailed approximately 4.4 million postcards at a reported cost of approximately $1 

million, with basic information on the Credit to businesses Ihat could be affected. 

The IRS also used several means to inform tax professionals about Ihe Credit 

Including press releases. presentations, an internet page to provide information 

on the Credit. electronic messages such as alerts and news articles, and a 

telephone line for taxpayer and practitioner questions related 10 the Affordable 

Care Act. 

• Employtlrs with more \l)8~ 10 bUI less Ihan 25 FTEs or average wages of moru Ihan $25.000 

bOl less Ihan $50.000 wjll not be efigible for the loll amount 01 tho Crudij bOl may qUillify lor a 

reduced amOlln!. 

e Ari 5 corporatlon is a corporation mat eleCts to t)e !aXe(! undel SobcMpter 5 01 Chapter 1 01 the 

lotflmal RfI~enue Code. 

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Guidance on Applying State Subsidy Rules is Be1n9 Developed 

While the IRS has issued guidance to taxpayers on how to account for 

Slate subsidies When calculating the Credit, Utile information was available from 

the IRS on which States offer suer subsidies. The IRS also did not issue 

guidance to its revenue agents' on which States offer this benefit for 

consideration when audilingtaxpayers. When we brought this to the IRS·s 

attention, the IRS acknowledged that it should do more In these areas and plans 

to obtain lax practitionels' thoughts on how to improve. As of the dale of our 

report. the IRS was in the process of developing a job aid lor revenue agents to 

use during exams. 

Potential Compliance Issues Exist 

There is a risk of errors or irregularities occurring when the Credit is 

claimed or processed_ The Credit is new, and both taxpayers and IRS 

employees will need to acquaint themselves with Ihe rules. The rules 

themselves are complex, making it difficult for taxpayers to follow. The IRS also 

had to complete new programming to accommodate the new Form 8941 and 

identify potential compliance risks. 

Even though the Credit is specifICally targeted to small employers. certain 

taxpayers may claim it even when they have not filed required employment tax 

returns. A lack of employment tax returns could indicate an erroneous claim and 

t/"Iat Ihe taxpayer is not even an employer, but could also be the resutt of t/"Ie 

taxpayer using the selVices of a Professional Employer Organization (PEO). 

Professional Employer Organizations began operating in the early 1980s 

and assume some employment-related responsibilities for client companies, 

including hiring some or all of the client companies' employees whose services 

are then leased back to the client companies. The PEDs pay wages and file 

employment tax returns on employees· wages that would otherwise be handled 

by Iheir client companies. An industry organization, the National Association of 

Professional Employer Organizations. describes this relationship as 

-co-employment." 

The PEO, acting as the emplo~er of the leased emp~yees, files 

employment tax returns under its own Employer Identification Number, and the 

client businesses where Ihe employees work claim other employment-related 

expenses and the related deductions and credits (as long as these were paid by 

the client bUSIness) under their (different) Emp!oyer Identification Numbers. This 

presents a challenge to the IRS to determine whether a company, which does 

not file employment tax returns, qualifies for the Credit without corresponding 

With or audlting Ihe company . 

, An employee in Ihe E~"m natioll fonctlon who conducts f"ce·\O-face e~"m nallon, of mO(e 

comple~ talC returns sooh as busioosses, pannershi;ls, cotpO<ations, and speclaRy taxes (a. g .. 

alCcise tax refurn s). 

• 
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While some businesses, such as companies Ihal only process payroll and 

file lax returns on behalf 01 other businesses, disclose similar arrangements 10 

the IRS, this is generally not the case for the PEDs. Other arrangements, where 

one business acts as an agent for another business, are disclosed on the forms 

fOf Employer/Payer Appointment 01 Agent (Form 2678) and the Allocation 

Schedule for Aggregate Form 941 Filers (Schedule R (Form 94 1 )). However, the 

PED business model is premised on the PED's view that il ls a legal employer, 

notlhe agent of the client business, 

We identified Ihe issue related to tracking Ihe relationships between the 

PEDs and clienl companies in a previous report.

a In Ihal repoti. TlGTA 

recommended that the IRS work With Ihe Department of the Treasury to explore 

all options, including use of the revised Form 2678, to establish accurate links 

between the PEDs and Iheir clients. The IRS agreed to establish links between 

PEas and their ctients; however, it did not accomplish this. 

The IRS has a high-priority compliance program aimed at identifying and 

auditrng employers who have not paid employment taxes. Businesses using the 

PEDs may unnecessarily fall into this compliance program, resulting in a waste 

of IRS resources and an increased burden on the affecled taKpayers. 

To administer employment tax laws and to effectively use scarce 

compliance resources, the IRS needs to be able to identify businesses that begin 

using the services of a PEa, as well as when businesses lermlnate Ihe use of 

those services. Without this ability, the IRS may not take appropriate actions 

against the businesses that do not pay employment taxes or improperly claim 

credits. 

We recommended Ihat the IRS track PEa relationships by inputting crossreferenced Employer Identification Numbers on the client business tax accounts.

9 

IRS management agreed with this recommendation and indicated that it will 

revise impacted form instructions to require reporting that will closely track 

relationships between businesses and PEDs and Professional leasing 

Organizations filing payroll returns. We plan a follow-up audit to ensure this 

issue has been corrected. 

The Credit is refundable 10 tax·exempt taxpayers. which is a high-risk 

faclor for erroneous refunds. The IRS advised that. as of September 30. 2011 . 

compliance personnellrom its Tax Exempt and Government Entities Division had 

initialed examinations on 769 relums from lax-exempt organizations claiming the 

Credit. The IRS also advised that through mid-October 2011, 9,697 tax-exempt 

organizations (taxpayers filing Form 990-T) claimed Small Business Health Cal e 

I TIGTA. Ref. No. 2007-30-169. Improvemflnls Hltve 86M Mr>de to MonitorEmployers Thill Use 

Professional Emplo~f O'T1l1nizllOOnS, bill Mom Can Be Dol/It (Septemoor 2007) t TIGTA, Ref. No. 201' .... 0-103. Affordable Cllte Act: Efforls/o Implemenl/he SrrniI/8usinefS 

He8lth Cllffl Tllx C~/ WI!fl.! Mcl$rJy S(K":CttSSfuJ, but Sorrno /mprovemellt$ Afl.! NI!tIded 

(September 2011), 

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Cred(!s, totaling $36.4 million. 

The Tax Exempt and Government Entities Divjsion Implemented a two· 

step process lor verifying the Credit claimed by tax·exempt organizations on 

Form 990·T, First. the IRS developed computer programs 10 det~t potential 

errors on Forms 990·T claiming the Credit. This validation process occurs before 

funds have been released to the organizations. When errors are detected, the 

IRS will freeze any associated refund and notify the organization tlJrough a 

notice. Tax Exempt and Government Entities Division personnel will review the 

Form 990·T to determine if an examination is warranted. 

The second step is an examination of the documentation supporting the 

Credit claimed on Forms 990·T Identified by the IRS with potential errors. 

Examinations can be performed either before the refund is issued or after. If IRS 

resources are available before the refund is issued , an examination will be 

initiated to determine if the Credit is valid and whether a refund shoukl be issued, 

If a determination is made that sufficient resources are not available to perform 

an examination, the refund will be released within 45 days. For these returns, 

the IRS will provide a listing of cases to its compliance personnel for potential 

review during its regular post-refund examination process. At that time, the IRS 

can perform an audit of the taxpayer's records by a correspoodence audit, office 

audit, or field examination. During these audits. taxpayers will be asked to 

provide the documentation necessary to verify the Credit claimed on Form 990-T, 

The Volume of Credit Claims Has Been Lower Than Expected 

Despite IRS efforts to inform 4.4 million taxpayers who could potentially 

qualify for the Credit, the volume of claims for the Credit has been low. The 

Credit was designed to encourage small employers 10 offer health care 

Insurance. However, Ihrough mld-Oclober 2011, the IRS reported that 309,000 

taxpayers (including the tax-exempt taxpayers previously referred 10) had 

claimed the Credit for a total amount of 5416 million. '0 This is substantially lower 

than the Congressional Budget Office estimate that taxpayers wou'd claim up to 

$2 billion of Credit for Tax Year 2010. (Appendix II pro ... ides the volumes and 

amounts of Credits filed on each type of tax return.) 

Although the IRS sent postcards 10 businesses that might potentially 

qualify for the Credit to make sure they were aware of it, the IRS dkl not ha ... e ready access to data that would allow it to detennine which of these businesses 

actually offer health care insurance to their employees or otherwise qualify for the 

Credit. Many small businesses do not offer health insurance and would nol 

qualify for the Credit. Other factors, such as family members working as 

employees or the business failing to offer an appropriate health care plan, might 

also cause businesses to be ineligible_ 

,. Internal Revenue Sef"ice Matislies an credilS dalme(l Ul'l(ler I,RC. § 45R 

6 
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The IRS spoke With Industry groups and professional organizations 10 Iry 

to determine why businesses were I')ot claiming the Credit. Some reasons given 

were: smail businesses may take a wait and see approach with the Credit : the 

Credit is not worth Ihe lime and effort 10 claim it: taxpayers are unclear on U1e 

specifics of the Credit and rely on tax professionals to claim it; and businessrelated Information needed to claim the Credit Is not readily available. 

The IRS conducted focus groups with tax practitioners in conjunction with 

its Nationwide Tax Forums 10 Identify knowledge gaps on the part of taxpayers 

and lax practitioners, determine barriers to taxpayers claiming the Credit, and 

determine belter ways 10 communicate with stakeholders. In general, the focus 

group participants were aware of the Credit, but many could not explain the 

specific eligibility requirements and indicated they would not feel confident 

calculating the Credit themselves. Few participants had completed Form 8941 

for their own business or for their clients. They indicated that ihe Credil is not 

easy to calculate and the payroll information needed to calculate accurately the 

Credit amount was not readily available to them. They also stated U1al the 

instructions lor calculating the FTEs were not clear causing clienls who may have 

been eligible for the Credit not to claim it. In addition, many of the practitioners' 

clients had not claimed the Credit because they did not offer insurance or did not 

meet the eligibility criteria. Practitioners indicated that given the current 

economic environment. the Credit was not enough to encourage their clients to 

start offering insurance. 

Some of the taxpayer errors and omissions were not identified by the IRS 

There was insufficient information on the Form 8941 and other forms med 

with taxpayer returns to identify aU errors made when claiming the Credit; 

however, based on the Information thaI was available, we concluded that some 

claims contained errors 11 or were incomplete. 

We reviewed a judgmenta\ly selected sample of different return types as 

they were being processed at the Austin, Texas, and Ogden, Utah, IRS 

campuses, We chose the returns based primarily on how many forms 01 a 

particular type were available during our visit and whether we noiiced any 

anomalies during our review, Our review included 257 returns for individuals. 

businesses. and lax·exempl organizations, The results of the judgmental sample 

cannot be used to eslimate the extent of actual errors. The purpose of the 

sample was to identify the types of errors that were occurring, but was not 

intended to project the frequency of those errors. Additionally. we analyzed 

computerized data that were available prior to the end of the filing season for 

possible issues. The types of problems we identified through either U1e case 

review or data analysis included: 

., Ttle Form 894t does nOl contam all of Ihe data and calculalOooS needed 10 ve~ty each slep of 

Cfedit ellgibility and calculallon, II is necessa.y 10 complele wOlicsheels In \he InslruclOons for lhe 

Farm 8941 in order 10 correctly claim the Credit The worksfieets are not filed wllh Ihe ,elum 

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• Obvious errors in calculatlng FTEs. The number of FTEs claimed 

exceeded the number of employees reported. 

• IncolTect use of the applicable percenlage, Taxpayers either used the 

wrong percentage to calculate the Credit or left that portion of the form 

blank. Tax-exempt small employers should use 25 percent and all other 

small employers should use 35 percenl. 

• IncolTect calculations of phase-oul rules. Taxpayers who had over 10 

FTEs Of who paid average annual wages of over $25,000 incolTectly 

calculated the reduced Credit amount. 

• Premiums paid that exceeded the maximum premium allowed based on 

the IRS's Slate Average Premium lor Small Group Markels, 

• Taxpayers reported that no employees for whom they paid premiums were 

covered under Qualifying arrangements (i.8 .. the health insurance 

coverage provided to the employees did not meet the specifications in the 

law). 

Missing Form 3800 or missing required information on Form 3800 related 

to a credit received from a pass-through entity (such as a partnership, 

trust, or Subchapter S corporation). Credits from pass-through entities are 

reported on Form 8941 . Any remaining pass-through Credit after 

adjUstments for ai' but Form 990-T is reported on Form 3800, which is 

attached to Form 1040, Form 1065. or Form 1041 . 

• Claims made with no evidence of employment-tax returns having been 

filed to show that the Form 1120 business had employees and was 

entitled 10 the Credit 

The tack of targeted math error authority could hamper IRS compliance 

efforts 

Some of the errors that taxpayers made could have been addressed 

during processing because they were straightforward arithmetic errors, which the 

IRS has authority to correct. We recommended. and the IRS agreed, to capture 

more data from the Form 8941 to facilitate addressing these types of elTOrs. 

Math error authority allows the IRS to correct certain errors during 

processing, inCluding calculation errors and entries that are inconSistent or 

exceed statutory limits. without having to issue the taxpayer a statutory notice of 

deficiency. This is especially Important with respect to refundable credits 

because sucl\ credits are targets for fraud. In our report regarding the Small 

Business Health Care Tax Credit. 12 we provided examples of specific errors 

taxpayers were making when claiming the Credit which are beyond the IRS's 

I> lIGTA, ReI. No '2011-40-103, AffOnJable CII'" Act: Effort$/o Implfm~nl /1111 Small Busmass 

Haaltll CII'" Tat Credit Wllre MosIIY Succllssf"l, bUI Some ImproVflmflnls Are Ne9f!ed 

(September 2011 ). 

• 
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current authority 10 correClthrough math error processes, but whlCtl could be 

addressed through legislation providing targeted math error authority, Math error 

authority would allow the IRS to improve compliance and avoid burdensome 

audits by correcting certain errors or contacting the taxpayer during processing, 

but prior to allowing the Credit or paying refunds on potentially erroneous returns. 

IRS management agreed that math error authority is an Important 

compliance 1001. and will explore with the Department of the Treasury whether 

math error authority is appropriate for Ihis Credit The IRS agreed thai ills 

beneficial to address potential compliance issues as early in the process as 

possible and has developed procedures to examine questionable returns prior to 

the issuance of refunds. 

Chairman Boustany, Ranking Member Lewis, and Members 01 the 

Subcommittee, thank you lor the opportunity 10 provide TlGTA's assessment of 

the IRS's administration of the Small Business Health Care Credit In closing, I 

would like 10 empnasize thai T IGTA will continue to monilor the IRS's 

implementation of significant provisions of the Affordable Care Act and will 

promplly alert you and the IRS of any problems or emerging issues. I would be 

pleased to answer any questions you may have al the appropriate lime. 

9 
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Appendix I 

Form Used to Claim the Credit 

_ 8941 .! C~1t 10. S"",II Employ .. ' W .. " lth In a ... """, .. P ...... lllm. -_ ..... - _ 

I 20110 ..... -... --... - . ...- --- -_ .-.. -.. ,- .... .. - -- • -"'_ ~ ... -~--)""--

...... .,..---=-............ --.. -- • 

• -)"" __ .... ....-"' .. "' ____ .... _--,...- . .......... " _ _..·0,.,._,. ........... _-_. • ____ l""'_ .......... , ___ • __ ... ,_'" 

...... __ ..... ..",-_ ...... _" . , • --- ............... _ ............ ... _-- _ ..__ ...... , .. _- • 

• ----........... _ ..... -......-... _--_ ... --"" ... -.. -_ .. """",,---"-- -- • 

• -.... ....-~- .... -. • 

• -_."' .... _- '" . , .. , _____ 8 .. ,.,..r ... · .... ___ .....,.,.,_I ... ,. .. ~ 

• 

.. '0 .. -. .... __ """'_".......-. _ _ • 

• ..... a .. "'o.ooo .. _. _____ ...... ___ • .. -"" .,....-.. -_ ... ~-"' .... ... -~..-- _._- ................ --'" .. " ............ '0. __ ., ........ __ · .. , • " 

"'-___ at_ ...... " . " " . _" '"--. ..... -,._ .. -........ , .. ""'"""-...- ... ....- .. ~ .........----_ .... . --,.....-..--.. ....,_ .•. ,....-- ~~-- .---.-~-.. .. -_ .......... ....-.. -...... ---..... --_ ... _ .. _ ..... ........ ""-,. .. " 

0_ .. ___ • __ ...... ____ 5 __ . 

- ,--, .... ,,--. " " -_ .. _ .... __ .... .. _-_ .... ...--_ ... "" ""-", .. .-., .. ",-,, "r- - t- " 

0-... ____ <> ___ ..,_'0 ..... __ 

.. --. _ " .... " .... _ .. .. " "'_ .. _.__. ____ ""20'0_ ._""_ 

-- " • ~ ...... .._ .... ____ ._ .... >O, ' 

• 

" __ _",~_. __ ",'._". T", __ --_ """"""SOOO, .... "'" .. _.,.., ......... "",,.-.......... -....... --.. " -_ .. _"'-_ .. __ ...... _"'-- - . " " """""",*",-- ~ ... --...... -,-».-,-~,.--"' .. ,--- " " -, ............ __ .... , ...... _-..,..._ .. _"'_..- -- • " T ... , .. ____ .... 

.. _ ..... ""r"""-.T. 

--. " ... ~ ......... ------- ""'-""' ........ .- - SOUrce. IRS web Site. 

10 
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Volumes 01 Credits Claimed 

By Return Types 

FornI 1120: u.s. Cf>'f/<lruli(J/I Illcume T!IX Ro!wm 

FlInn 112o-S: U,S, 111('0/lli' T{~~ Relumju, 1111 S Corpormiol1 

Fonn I 120-C: us. /IlWlIle T/1X Rr:lufII/ ol" CQQl'crmiv;! Ol itJ/iQI!~' 

I'{)ml 1120-P: U.S, Income Tux R(tllml 0/0 Ff>,eigu C()r[lOrwiO/I 

FornI 1120-FSC: U S. InL'QI/w Tox Rewrn ofo FoF't!igll Stiles CQrpurjllitm 

Fonn 1120- : U.S. ""v"',, Tux Relllrh / or lIon/HII.'hprS AS"tK:ifll/(JIM 

F(lnn 1120--L: U s. LIfo fI,S/lrfIl/Ce Comp.m)' fllCfJlI'" Tax Re//lrn 

Appendix II 

Form 1 120-PC: U S. Pro{J(!rry (/ltd Call1u/ry InsllrollL't' CumpolI)' InNwlt' Tax Return 

FornI 1120-POL: U.S, /"00111<' Tux Rpf/lm/or Cerlai" Polillcul O~Olli=Olio"s 

Fonn 1120-RE1T: u.s. i/ltvm/! TllJ: RlfI/lmj iJl' Real E.'Ia/., Im','Slm,'nl Trust;' 

Form 1120-RIC: U.S. {"comi! Tox ""Iurn/I)r Rexult"eJ h"'f'Slmr:n' Ct)"'fJ<Jpin 

Fonn 1065: u.s. Relllrn 0/ Parlner,I'lui' {nc()l>1~ 

FornI 1041: U.S. Im:um" Tux Reltlrnfiw &/U/cs IIIld TI'IISIS 

Fonn 990-T: exempl OrguIli:Ulioll BU"il/C'M {"came Tax Re/llm ((llId proxy 1(1:': lJuder 

~/iQ" 6f!33(e1J 

FornI 1040: S.I"dilliJllolll1~'f) "'t: Tax N('1I1I'11 

\l Form 1120-S l5 a pass-through form TMrefore, all cred ~ amounts should ha~fI been reported 

ttl individual sh:J(ehoiders. 

,. Form 1065 is a pass·fhrough latm. Thetefofe, all cledit amounts should have been reported fo 

IndiVidual partners. 

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Summary of Considerations 

in Determining Eligibility 

Appendik III 

IRS Notice 2010-44 describes the following factors in determining eligibility for 

the Small Business Health Care Tak Credit (Credit): 

• Delermine the employee5 who are taken il'l1o account for purposes of the 

Credit. 

o Ekclude any wages and premiulTlS paid related to partners, !'fIost 

owners ,' ~ or family members of these partners or owners. 

(' Seasonal workers are disregarded in determining Fl"!;:s and 

average annual wages unless the seasonal worker works for the 

employer for more than 120 days during the taxable year, although 

premiums paid on their behalf may be counted in determining the 

amount of the Credit 

o Emplo¥ers who are part of a controlled group or affilialed service 

group' are treated as a single employer. 

• Determine the number of hours of service. Consider hours for which 

employees were paid or entitled to payment (including vacations, holidays. 

iUness) and use any of three methods for calculations (actual. daysworked equivalency based on eight hours of servIce per day, or weeksworked equivalency based on 40 hours of service per week.) 

• Determine Ihe number of an employer's FTEs. 

a Oivide (1) the lotal hours of service (bul not more than 2.080 for 

any employee) by (2) 2,080. The result. if not a whole number, is 

then rounded to the next lowest whole number. In some 

circumstances, an employer with 25 or more emptoyees may 

qualify for the Credit if some of its employees work part-time. 

• Determine the average annual wages paid. Divide (1) the total wages 

paid for employees laken into account by (2) the number of the employer's 

FTEs for the year. The result is then rounded down to the nearest $1 ,000. 

Only wages that are paid for hours of service as determined under Creditrelated rutes are laken into account. 

.. SpedficaHy. ~ole Pfop(1elors. partnefS in a poutnl'fShip. sharehoklefs owning more \han two 

percent of iln 5 corpo ... tlon, and any owne~ of more than five percent of other bUSInesses are 

not taken Into iICOOUnt"il!! emplovoos for PUrpose!! of the Cred~, For pYfPO:Se5 oflhe C,ed~. II 

very cornprehensl~e Ii" of potenlilli rel~tlYeS and dependenl members oI!he<r hooseholds are 

excluded from eligibifrty. 

TO Groups covered IInder section 414(b), (e), (m). Or (0) of the Ioternal Revenue Code. 

12 
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Appendix III 

Determine Ihe premiums paid by the employer thai are taken into account 

lor purposes of the Credit Only the por1ion paid by the employer is laken 

into account 

() Determine the premiums related to qualifying arrangements. 

Qualifying arrangements may cover a wide range of medical 

expenses (9_g .. hospital or medical policies, cer1ificates, or service 

plans: denial or vision; long-term care). However, certain specific 

types 01 plans do not qualify." Different types 01 plans are not 

aggregated for purposes 01 meeting tt~e qualifying arrangement 

requirement. So if an employer pays for a health insurance plan 

and a separate vision plan, determinations must be made for each 

plan with respect to whether it is a qualifying arrangement 

tJ The amount of an employer's premium payments that are taken 

into account is limited to the premium payments the employer 

would have made under Ihe same arrangement if the average 

premium for the small group market in the Stale (or an area within 

the State) in which the employer offers coverage were substituted 

for the actual premium. For e)(ample, if an eligible small employer 

pays 80 percent of the premiums for coverage provided to 

employees. the premiums taken into account for purposes of the 

Credit are the lesser of the 80 percent of the tolal actual premiums 

paid or 80 percent of Ihe premiums thaI would have been paid for 

the coverage if the average premium for the small group mant.et 

were substituted for Ihe actual premium 

" See LR.C. § 9632(c)(t ) 
22 

Chairman BOUSTANY. Thank you, Mr. George. 

Ms. Ingram, you may proceed. 

STATEMENT OF SARAH HALL INGRAM, COMMISSIONER OF 

THE TAX EXEMPT/GOVERNMENT ENTITIES OPERATING DIVISION, INTERNAL REVENUE SERVICE, WASHINGTON, DC 

Ms. INGRAM. Chairman Boustany, Ranking Member Lewis, and 

Members of the Subcommittee, my name is Sarah Hall Ingram, 

and I am commissioner of the tax-exempt and government entities 

operating division at the Internal Revenue Service. And I also 

serve as the executive lead for the IRS operational planning and 

implementation of the tax law provisions of the Affordable Care Act 

of 2010. I appreciate the opportunity to testify with you here today. 

My purpose this morning is to discuss the credit and what actions the IRS has taken and plans to take to help insure that small 

employers that may be eligible for the credit are aware of it. 

The small employer health care tax credit is designed to help 

small businesses and tax-exempt organizations afford the cost of 

premiums for health coverage for their employees. In general, the 

credit is available to small employers that primarily employ low 

and moderate-income workers and who pay at least half the cost 

of single coverage for their employees. 

For tax years 2010 to 2013, the maximum credit is 35 percent 

of premiums paid by eligible small businesses, and 25 percent of 

premiums paid by eligible employers that are tax-exempt organizations. After 2013, eligible employers will be able to take the credit 

for 2 additional years, and the maximum credit will increase to 50 

percent for eligible small businesses, and 35 percent for eligible 

tax-exempt organizations. I provided further details on how the 

credit works in my written testimony for the record. 

Now, to claim the credit, a small business uses Form 8941 to calculate the credit amount, and then includes that amount as part 

of the general business credit that it takes on its income tax return. A tax-exempt organization, which generally, by definition, has 

no income tax liability, uses the same Form 8941 to calculate its 

refundable amount, but then claims the credit on Form 990T. 

Because the credit was enacted mid-year in 2010 but was effective immediately—in fact, back to January 1—the IRS was concerned that not all small employers that might qualify for the credit would know about it, and would claim it on their 2010 return. 

So the IRS launched a significant outreach campaign in the months 

following enactment. 

In April, to increase awareness in the community, the IRS 

mailed postcards to more than four million small businesses and 

tax-exempt organizations that were identified as potentially eligible 

for the credit, based on the limited payroll data maintained by the 

IRS, which gives a general indication of the number of employees 

and their wages. 

The IRS issued detailed guidelines in May. And based on our 

continuous engagement with the small business and practitioner 

communities, we have regularly added materials and tools to a 

dedicated webpage on IRS.gov, including frequently asked questions, multi-language videos, practical tool kits, and even a recorded webinar. 


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23 

Since the provision was enacted, the IRS has held or participated 

in more than 1,500 outreach events targeted at small businesses 

and the tax practitioners and business professionals who serve 

them, both to increase awareness and knowledge in the community, and also to obtain practical feedback on our outreach strategies and on our materials. 

The IRS is now developing a new outreach campaign to ensure 

that small employers that are eligible for the credit in 2011 will 

know how to claim it on their returns filed for the 2012 filing season. Based on our experience to date, and feedback from the community, this campaign will focus on working with our partners and 

stakeholders, including the tax software industry, insurance agents 

and brokers that work with small businesses, and the tax practitioner community. 

The IRS is working to enhance information available through 

IRS.gov, as well as through social media and other venues in order 

to better communicate information to the small business community and the professionals who advise them. 

Mr. Chairman, this concludes my oral testimony, and I’d be 

happy to answer any questions. 

[The prepared statement of Ms. Ingram follows:] 


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WRITIEN TESTIMONY OF 

SARAH HALL INGRAM 

COMMISSIONER OF THE 

TAX-EXEMPT AND GOVERNMENT ENTITIES OPERATING DIVISION 

INTERNAL REVENUE SERVICE 

BEFORE 

THE COMMITTEE ON WAYS AND MEANS 

,SUBCOMM1TIEE ON OVERSIGHT 

ON THE SMALL I!MPLOYER HEALTH CARE TAX C~ eOIT 

NOVEMBER 15, 2011 

Introduction and Summary 

C~allman Bouslany, Ranking Memoor Lewis and Memools of the Subcomminee on 

Oversight, my name Is Sala~ Hallll19ram and I am Commissioner of the Tax-Exempt 

and Gavemmenl Entities Operating Division at the Ir'ltema) Revenue Service. I also 

serve as the executive lead on the IRS's operalional planning and implementation of the 

small employer tax credit and ethel" tax law provisions of the Affordable Care Act. I 

appreciate the opportunity to testify on the Small Bl.lSir'less Health Care Tax Credit, 

whiCh was enacted as part of the Patient Proleclion and Affordable Care Ad of 2010_ 

My purpose here Ihis morning is to axplaifl how the credit works, what t~a eligibility 

requirements are, how 10 claim Ihe credit, and what actions the IRS has laken 10 help 

ensure small b1Jsinesses thai may be eligible for the credit are aware of~ , 

The credit is designed to help small busir'lesses and tax-exempt organizations afford the 

cost of providing health coverage to their employees, In general, the credlllS available 

10 small employers that primarily employ low- and moderale-income workers, and pay at 

least half the cost of .sIngle covelilge for ttlelr employees~ 

For tax years 2010 10 2013, Ihe ma:J(imum credit Is 35 percent of premiums paid by 

eligible small businesses and 25 percent of premiums paid by eligible employers Ihat 

are tax-exempt organizations. For tax-exempt organIzations, the credit cannot e~ceed 

the tolal amount of [ncome and Medicare tax withheld from emp~ees' wages for the 

year and the employer s~are of Medicare tax for the year. After 2013, eligible 

employers will be able 10 lake the credit for two additional years. Beginlling in 2014, the 

maximum credit will increase 10 50 percent of premiums paid by eligible small business 

employers and 35 percent of premiums paid by eligible tax-exempt organlzallons. 

The maximum credit goes to smaller employers-lt1ose w"h 10 or fewer full-time 

equivalent (FTEJ employees - paying annual average wages of $25,000 or less. Tile 

cred~ is completely p~ased out for employers ~at have 25 FTEs or more or pay 

average wages of 550.000 per year Of more Because the eligibil"y rules are based in 
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part on the number of FTEs, not the number of employees, bus,nesses Ihilt use parttime help may qualify even if they employ more Ihan 25 ir)diYiduals 

QualifYing Arrangements 

By law, only premiUms paid by the employer Uoder an arrangemel')t meeting certain 

requirements are counted in calculating the credit. Arrangemenm thai meel these 

reqUIrements are considered 10 be "qualifying arrange!1]ents: Under a quallfylng 

arrangement. the employer pays premiums for each employee enrolled in health care 

coverage Offered by the employer in an amount equal to a uniform percentage (not less 

than 50 percent) of the premium cost of the coverage. Howe~er, a qualifying 

arrangement can also be one under which the employer pays at least 50 percent of the 

premium cost for employee-only. or single, co~erage for each employee enrol~ In any 

health Insurance oo~erage offered by the employer. 

The IRS issued guidance last year clarifying that the aedit is a~ailable to a broad range 

of employers, including religious institutions thai provide self-insured coverage through 

denominational organizations, small employers that cover their wOTllers through insured 

mullierTIp~er health and welfare plans, and employers that subsidize their employees' 

health care cosm throogh a broad fange of contribution arrangements. 

Determining FTEs and Average Annual Wages 

To determine whether an employer with a qualifying arrangement is eHgible to claim the 

credit, the emP'over must first calculate the number of FTEs for the year. This is done 

by dividing the tOial hours of service for which the employer pays wages to emploYees 

during ttle year by 2,080. 

Because the limitation on the number of employees Is based on FTEs, an employer wllh 

25 or more employees COUld qualify for ttle aedit if some of its employees wor!<. part· time. For example. an employer wilh 40 ha~-time employees - those who are-paid 

wages lor 1 ,()oIO llOurs fOf the year - is deemed (0 have 20 FTEs and therefore may 

qualify to claim the credit 

For purposes 01 computing the number of FTEs, !/'Ie law generally does not require 

employers to count seasonal workers. In addilfon. business owners such as sole 

proprietors and partners 11'1 a partnership are not counted as employees for purposes of 

!/'Ie credit and are not counted toward the number 01 FTEs, even thO\Jgh these 

individuals may provide services to the business, A similar exclusion applies to a 

bUSiness owner's family members who work for the business. 

In determining eligibility, the employer must also calculate the amount of average 

annl.lal wages paid to employees, To calculate the amO\Jnt of average annllal wages. 

an employer must divide !/'Ie total wages paid during the tax year to employees by the 

number of the employer's FTEs for the ~ear, The result is then rounded down to the 

2 
26 


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nearest $ 1,000. As with FTEs, the average wage computation does not inc;lude 

seasonal workers, generally, and does !"lot inc;lude business owners or their family 

members working In the business. 

How Employers Claim the Credit 

To claim the credit, a small busllll!ss uses Form 694 I to calculate the credit amount. 

and then inc;ludes that amount as part of the general business credit that it takes on ils 

income tax relum A tax-exempt organization. which general~ by n~ion has no 

income tax liability, uses Form 8941 to calculate its refundable credrt. amount, and then 

Claims the credit on Line 44f of Form 990-T Though the Form 9OO-T is filed primaril~ by 

those organizations liable for the tax on unrelated business income, it can also be. used 

b~ any eligible tax-exempl organization claiming the credit. regardless of whether the~ 

are subjee! to unrelated business income lax, 

The credit can be used to offset an employer's alternative minimum tax (AMT) liability 

for the year, subject 10 certain limitations based on the amount of an employer's regular 

tax liability, AMT liability and other allowable credit. Also. uoder the general business 

cred~ rules, as amended by section 2012 01 the Small Business Jobs Act 012010, the 

I.IIlUSed 4SR Cledit determined in taxable years beginning after Dec. 3 1, 2009 and 

before January " 2011, may be camed bac::!( "ve years or forward up 10 20 years. 

IRS Education and Outreach 

Because the cred~ was enacted mid-year in 2010 anCl was effective immediately upon 

enactment. the IRS launched a signifICant outreacl1 campaign to small businesses In the 

months fallowing enactment. Actions taken as part of this campaign inclUded the 

following' 

In April 012010. to increase. awareness, the IRS mailed postcards to more than 4 

million small businesses and tal<.-6xempl organizations that were identified as 

po\en~a ly eligible for the credit based on limited payroll data maintained by the 

IRS whfch gives a general indication of number of employees and wages (without 

knowledge 01 whether they otherwi!l! qualify); 

In May of 2010, the IRS issued detailed guidelines. illustrated by mare than a 

do~en examples, to help small employers determine whether they qualify for Ine 

credit and assist them in estimating the amount of credit they could receive: 

DUring 2010, the IRS posted videos in English, Spanish. and American Sign 

l anguage (ASl) to its YouTube cl1annel describing the basics 01 the credit and 

how to c;la,m il: 

Since enactment, the IRS has held or atleflded more than 1,500 olJtraach events. 

(ranging from large conferences and webinars to wOrl\shops aod focus groups) 

targeted at small businesses and the ta~ practitioners business professiol'\als 

who serve them: and 

, 
27 

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On a regular basts, the IRS has added materials and 1o0ls to a dedicated page 

on irs.gO'l (IrequentJy-asked-questions, tax tips, teaching materials, etc.), 

reached out to a wKle range of stakeholders through E-news lists and 

newsletters, and provided partners with materials and links to use in their own 

channels and programs. 

IRS collaborated with HHS and SBA on outreach and usefUl materials to 

maximize effective education ofltte small business community, Ir.cIuding SBA 

web!nar and HHS e-news. 

The IRS is now developing a new outreach campaign, 10 ensure thai small employers 

that are eligible for the credit in 2011 will claim It on Iheil 2012 returns. This campaign 

will locus on wor1\ing with our partners. including: 

The tax software industry. to Improve access to educational Information and to 

help alert small employers and practitioners when taxpayers may be eHgible lor 

the credit: 

Insurance agents and brokers who work with small businesses, to help ensure 

that participants in Ihe health insurance mark.elplace undelsland the features and 

benefits of the credit. The Department of Health and Human Services recently 

sent an email to 2,000 agents and brokers alerting them to the credit for their 

small business clients; and 

The small business and practiTioner community, to provfde additional materials 

and educational opportunities regarding the credit, including weblnars and 

toolkits. 

The goal of our outreach and education has been 10 inform eligible small businesses 

and tax-exempt organizalions how they can claim the Small BUSiness Health Care Tax 

Credit to reduce their taxes. To do this. we highlighted the advantages of claiming the 

credit to both eligible small businesses and practitioners. 

We conilnue to seek input to further deliver our messages to a number of key 

audiences: small business owners, tax~xempt organizations, tax preparers, insurance 

agents and brokers. The IRS will conlinue to communicate through social media and 

ethel venues. including IRS YouTube videos and Twitter feeds. We plan 011 continuing 

and expanding our relalionshi~ with external stakeholders as we col!abora\ively find 

new and innovative ways 10 market this valuable tax credit. 

Conclusion 

Mr. Chairman, this concludes my testimony. I appreciate the opportunity to testify about 

the Small Business Health Care Tax Credit. I will now be happy to answer any 

questions that you may have. 
28 

Chairman BOUSTANY. Thank you, Ms. Ingram, and I appreciate your testimony. 

We’re talking about a relatively new tax credit that appears to 

be somewhat complex for the small business owner trying to navigate through it. And now we have preliminary figures that show 

that it’s not being utilized or claimed to the extent that was initially thought would be the case. 

And so, Ms. Ingram, I know IRS has gone through great efforts, 

sending out 4.4 million postcards, holding numerous outreached 

programs, as you outlined, and it’s certainly detailed in your written testimony. Yet, as of mid-October, the figure that we have is 

309,000 taxpayers out of a potential 4 million have taken the credit. And while we recognize it’s early and we’re not finished with the 

season yet, do you have more recent numbers as to who has filed 

for the claim—or for the credit? 

Ms. INGRAM. No, Congressman. The 309 figure is the most recent. 

Chairman BOUSTANY. The most recent. What’s the cost to date 

to the IRS for the outreach program and for the implementation efforts? 

Ms. INGRAM. I don’t have figures broken out by this provision. 

We use many of the same people to work on a number of provisions. So we would have to reconstruct that carefully—— 

Chairman BOUSTANY. Okay. 

Ms. INGRAM [continuing]. And provide that followup. 

Chairman BOUSTANY. If you could provide that to the Committee—— 

Ms. INGRAM. Yes, we will give you what we can. 

Chairman BOUSTANY. I appreciate that. And, Mr. George, I think TIGTA estimated that it’s been about $29 million that’s been 

spent on this? 

Mr. GEORGE. Well, we know that the IRS has requested that amount. And to assist my colleague here, they’ve expended over $1 

million in the effort to inform the potential eligible taxpayers about 

this tax credit. But again, they have requested over $24 million to 

help implement this credit. 

Chairman BOUSTANY. Thank you. And, Ms. Ingram, TIGTA’s 

report noted that the IRS has asked industry groups and professional organizations to determine why businesses are not taking 

the credit. Does the IRS engage in similar outreach programs, and 

for other types of tax credits? For instance, an R&D tax credit? 

Ms. INGRAM. We have a fairly continuous process of talking to 

the practitioner community or industry associations about how 

their understanding and implementation of provisions are that affect that particular group. 

Whenever we have new provisions coming into the tax laws, we 

do take opportunities to try to get focused feedback, both about the 

level of awareness, and anything we can do to assist people in either understanding whatever the provision is, or improve our tools 

so that they can take advantage of them. 

So, for example, in our summer tax forums, which is a practitioner—gathering of tax professionals every summer across the 

country, we do focused feedback sessions with practitioners to get 

at that kind of information. 


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Chairman BOUSTANY. Thank you. And does the IRS want math 

error authority for this particular tax credit? And if not, why? 

Ms. INGRAM. We engaged in some good conversations with the 

TIGTA audit team about how the current math error authority or 

augmented legislative math error authority could be used in this 

setting. And we have shared those conversations with the Treasury 

Department, who is looking at ways in which there might be some 

policy choices around this credit. 

Chairman BOUSTANY. Thank you. And is there some concern at 

this stage—this tax credit was proposed as a means of helping to 

mitigate the high cost and rising cost of health insurance premiums for small businesses, which are under tremendous pressure 

right now. 

And my sense is, based on testimony I’ve read and other reports, 

that this tax credit is not achieving that goal of helping to bring 

down those costs, and helping, you know, small businesses to provide health insurance for their employees. Is there a concern right 

now at the IRS, or are you just focused now on purely the administration of this tax credit? 

Ms. INGRAM. Well, the analysis about the policy and economic 

impact would be better addressed to the Treasury Department. My 

role is to take what we have and implement it as well as possible. 

And, as I mentioned, my two goals are to educate the community 

and get them what they need, and listen to them about what they 

need, and then to make sure that what gets filed is an appropriate 

claim for the credit. 

Chairman BOUSTANY. Mr. George, in the TIGTA report on IRS 

efforts to implement this tax credit, you discuss problems with 

tracking employees when employers use professional employer organizations. I read your written testimony with great interest on 

this. And can you explain what the problem is with regards to this 

particular tax credit, and how the IRS could potentially fix this 

particular problem? 

Mr. GEORGE. Yes. Again, in effect, the IRS has—or there are 

entities called, again, PEOs, which are outsourced to by small businesses and the like, so that certain aspects—accounting, you know, 

leave, medical leave, what have you, these businesses will take 

over those responsibilities for a small or, you know, individual 

practitioner to help alleviate that burden from that person, and 

they will be paid a fee. The PEOs will be paid a fee. 

And so, the problem is there is a disconnect between what the 

IRS knows and doesn’t know, as to who is actually paying the employee taxes and the various taxes, as they relate not only to this 

credit, but to other credits. And we recommended in a report over 

two years ago that the IRS, seek legislative help from the department—because it is the department who has responsibility for developing tax policy—and to address better ways in which the IRS 

could develop processes, internal processes, to match the various 

Employee Identification Numbers between the PEOs and the organizations with which they contract. 

And for some reason, which—I will defer to the IRS—that hasn’t 

been done. And had that been done, it would assist not only in the 

implementation of this particular credit, but in others. 


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Chairman BOUSTANY. Before I turn to the Ranking Member, 

Ms. Ingram, do you want to respond to that? 

Ms. INGRAM. The issue of how to handle professional employee 

organizations has been a matter of discussion as we’ve tried to 

work through the extent to which what is needed is legislative 

change, and to the extent what is needed is changes in systems and 

forms. 

I don’t think that we have any difference of philosophy about 

what would be advantageous. I think as we work through the logistics of what we can do administratively, in addition to sharing 

analyses with the Treasury Department, we continue to welcome 

all of the advice we get from TIGTA about ideas of how to do that. 

There were some additional ideas in this report, and we’re working on those now, and I assume we will have further dialog, in case 

we have questions about TIGTA’s advice. 

Chairman BOUSTANY. So, are you confident that that can be 

fixed? 

Ms. INGRAM. The—— 

Chairman BOUSTANY. Without legislation? 

Ms. INGRAM. We could do some things. We have to make sure 

that we’re not burdening legitimate arrangements, and that we do 

it in a way that enables us to check what we need to check without 

being burdensome on people who are otherwise just following the 

rules just fine. 

So I think those logistical issues we want to continue to work on 

internally. 

Chairman BOUSTANY. Thank you. Mr. Lewis. 

Mr. LEWIS. Thank your, Mr. Chairman. Commissioner Ingram, 

I believe it is too early to draw any conclusions about the credit. 

Commissioner, many businesses request extensions and file their 

returns in October and November. Is this correct? 

Ms. INGRAM. Yes, they do. 

Mr. LEWIS. When will the agency finish processing these and 

other tax returns? 

Ms. INGRAM. As you stated earlier, sir, it’s toward the end of 

the year that we would finish processing and posting the returns 

all the way through the season. In fact, today is the last day that 

the exempt organizations could file and claim those credits. So, 

they would—returns are still coming in for this credit. It will be 

the end of the year. 

Mr. LEWIS. Commissioner, early data show less than 5 million 

business returns have been processed through mid-October, and 

that over 10 million business tax returns were processed in 2010. 

Is this correct? 

Ms. INGRAM. I don’t have the figures directly with me, but I believe—the difficulty with those figures is that it depends on which 

returns you look at, if you look at 1120s and 1120Ss and 1065s, or 

whether you also include the 1040 returns that include schedule 

C’s and the other schedules that indicate business activity. So I 

would prefer to respond afterward, with a full set of data. 

Mr. LEWIS. Thank you. With respect to small corporations, the 

so-called, I guess, S-corporation, early data show that less than 2 

million returns have been processed through mid-October, and that 


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about 4 and a half million returns were processed in 2010. Do you 

believe this to be correct? 

Ms. INGRAM. Again, I’d like to make sure I can confirm that 

after the hearing. 

I think what is true is that the partners in flow-through—the recipients of flow-through adjustments like this credit, if they’re filing on extensions, would go to October 15th. And the data that we 

were able to pull for the request for this hearing would not include 

everybody who had filed on the October 15th date, for a variety of 

reasons, whether they came in on paper, or whether they were in 

the queue for posting and processing. So it is an incomplete data 

set at this point. 

Mr. LEWIS. Commissioner, so with less than 50 percent of business returns processed through mid-October, is it too early to know 

how many businesses will claim the tax credit this year? 

Ms. INGRAM. It is definitely too early to know how many total 

claims we are going to get. And, as I mentioned, although the taxexempts are a very small portion of this picture, their deadline is 

not even until today. So, yes, we do not have final numbers. 

Mr. LEWIS. Thank you very much. Mr. Inspector General, what 

grade would you give the Service on its outreach effort for the 

health credit? If you had to give a grade right now, this moment. 

Mr. GEORGE. Well, if I may, sir, answer the question in the following manner, the overall implementation of this credit by the 

IRS, we would give them a B to a B+. We think they have done 

an effective job implementing the credit, reaching out to people, 

and changing the computer processes that are needed to be 

changed to help accommodate it. 

Again, the challenge is the complexity of the law itself. And so 

that is a different issue. But overall, we would—I would give them 

a B, B+. 

Mr. LEWIS. Mr. Chairman, I am concerned that the proposed 

Republican budget cuts would hurt taxpayer service such as outreach efforts, compliance, and enforcement. 

Without objection, I would like to enter into the record an October letter from the Commissioner that provides an example of how 

the budget cuts would hurt small businesses. 

Without objection, I would also like to enter into the record the 

Commissioner’s November notice to employees announcing an early 

out, or buy-out program. 

Chairman BOUSTANY. Without objection, both will be entered 

into the record. 

[No response.] 

[The information follows:] 


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76181A.019dkrause on DSKHT7XVN1PROD with HEARING

COMMISSIONER'S CORNER 

A Message from IRS Commissioner Doug SilUiman IR

As I shared with you recenUy, QUI' fiscal year 2012 budget ouliook is challenging . I have continued to explain to Cong

that a signifICant reduction in our budget would have serious detrimental effects on the nation's tax system. 

Because empIoyee-relaled expenses account for the vast majority of our budget, we must reduce our workforce if ou

budget is reduced by the amounts now being discussed in Congress. Last year. we were able 10 adlieve the needed 

workforce reduction through attrition, but this year we will need to use some new tools. While we continue to have 

conversations with members of Congtess, we must take additional steps for potentially significant budget reductions

Today. I wanted to let you know that we will 5000 be offering eas1y outs and buyouts for a limited subset of OUt emploThese programs are fonnaYy called Voluntary Eany Retirement Authority (VERA) and Voluntary Separation Incentiv

Payments (VSIP): both options InVOhl8 voluntary separations for employees who are retiremenl-aligible 0/' close to it

We plan to make these buyout offers 10 a limited set of employees in positions that do not involve direct s8l'\Iice Of 

enforcement interactions with taxpayers. Our budget situation remains quite uncertain, and ii's possible we wlU have 

offer a second round of bUyouts to a wider range of employees who deal directly with taxpayers in service and 

enforcement matters. However, in light of the importance of the filing season, we wooId generally not offer buyouts in 

campus OPefations. We are keeping a close watd! 00 the situation in Congress and will respond accordingly. 

We recognize there wiU be a lot of questions, and we will make sUI'e you have all of the Information you need. More 

will be coming early next week. In addition, we are continuing 10 wori< with Colleen Kelley and NTEU ()(l the roIl-out o

VERA I VSIP offers. 

The IRS has weathered many down budgets and workforce challenges over the years. Those who have been in the 

Service for a While know that we have a tradition 01 doing everything we can to minimize involuntary INOr'kforce 

restructuring. 
33 


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OEPAR fMENT OF THE "TR£ASURV 

l" OlH" ~ OIF.v u <UIr "~ ".I ~~ 

'w .... " ' .. G TON. O.<:- U U. 

0et0be<-17,2011 

The Honorable John Lewis 

RiIOkM'Ig Member, OYol$ight SUDeclmmittee 

CQ!T\II\iueo on Ways and Mean .. 

U,S, HOV!Oe of Repre;se ... tatiYes 

Wawlf'gto .... DC 205Hi 

DBar Mr, lBWis: 

In reeent y&8111, you/ committee has had an interest in IRS cere operations. irIcluding 

our managemltf1t of tax filing season. ta.;payer ~CB. and thfI Mfo/cement aflhe 

nation's tax laws • • WIlla 10 updal<:! you 011 the effeds to 11'1.8 IRS and laxpayera if \he 

Dodget CUfS voted oot of the House arld Senate Appropriations Committees we'lI ultimately enacted. 

'reoognize the fISCal challenges lacing the nation and am committed 10 ooo\inuing to 

100II.: fof savings In IRS operations where we can impro'Ie efflciency wilhoul culling into 

eore lal($l&yer servi(;a and front·line enfon:emenl. To thaI end, 0ViI11t1e Iasts,weI'al 

year. the IRS has maintahed e dlseipllned fows on identifying cost·affective aoIulions 

in order 10 maximize IRS produoti'o'lty, Forell3rT1ple, through our focused efforts 10 

Increase electronic filing of tax returns, we haw! cui the numbar of tax return ptOCeil$lng 

s~eB in helf-from ten to mil. ThlOugh tl'lls efrort and othef targel6il efficiency pmgrams, 

we 1l.'IfI gellef8ted Ilundreds ofm~liollS of dollal$ in savings, 

However, ClJIs oflhe magnitlde contemplated in the CUtTent 8flPlOprialions biWs 

(approximatety $525 mil lion from core IRS accounts in the Senate bill;md $650 m illion 

in the House bill) wouklleiid 10 noIloaable degrada~on of both se"";te and M forcement 

alld would Ile\le a serious detrime1llal impact on IIOloolalY compliance for years 10 -. 

Allhougn the current CorItinulng Resolution. set 10 expire Novemoer 18, set! fi.w'lding for 

IRS allflWlls 1,5 pel'!:enl beloW fJ9C8J yeal 201 ' , the fuY·year cuts ClInerllly being 

contemplated are 50 suiJatanllallhal we Ilava no choice bulla Immedialely reduce (Ill( 

spending run rate (above and beyond the aggressive afficiency lnlliatives already 

planned). ThfI opel'8llonal rear.tle$ of the faderal bud98t process do 1'101 a~QW us IOwalt 

for a final FY 2012 budget because ilwe did, we would 00/ have enough time 1efI '" lhe 

year 10 make lila spandiog cuts Itlal could be required, 
34 


dkrause on DSKHT7XVN1PROD with HEARING76181A.021

3 

~~ 

~. budQ't with the ~ dIM mlgrWtude ,ecoo,.,1ItI1deci by !he 

OfCOUl'M. I r..pectlhecongr.s' .. ~k>set 

funding for !he IRS .. It _ fit, but Ngher fUnding ........ for the IRS -*I aIIo help 

~ 1M deIIcit. I neD !hat 1M AdminiIlraIIon has propoMd • pIOgratn InIDgI1ly 

II"IiIIIItM for 1M Joint Select ~Ittee on DfIfidt Redudion'. . 

You t.ve my oommiImefIt tMt the rn.I WId women of !he IRS will WOf1I. hard to mItJgete 

II!l'j' ~ to the Ia lyIIem lind wli continue to_the NtIon ptOUdly. 

I 

~ 

." .-0 wrIItng to h ChIInnBn 8Ild JWlkIng ~ of !he Ho..e WWp and .....,. 

WldRanlclng 

(tInd 

~ofIheHouH~~~~

IN ct.innan oflhe o-.IghI SiJx:oo'nmi;tM) and !he ~ 

. 

WIll .. 10 .... ChMmen lind Ranking MembIIq of Ihe s.n. eon.N:IM on I'Nnce 

Mel the s.nat. AppropOMIcns FIn8ncItII s.M:M SWoornmInM. Plea. ctl me II' you 

would '*- \0 dItewe INI rnd« Jurltw or I\I.~ ~ Itlff ell" Floyd WWI8mt, Director, i.egb:'-IIve AtfaIfi. at (202) 622-4725. 
35 

Mr. LEWIS. Mr. Inspector General, in your testimony before this 

Subcommittee in September, you stated that the Service had limited resources to examine claims after energy tax credits had been 

paid. Does this statement apply to the health care tax credit? 

Mr. GEORGE. It does, sir. I mean the IRS—one of the previous 

commissioners of the IRS used to use a formula of customer service 

plus enforcement equals compliance. And that theory still exists 

today. That concept, I believe, is still accurate now. For the IRS, 

it is almost a zero-sum gain. They have limited resources. They 

have to make a determination as to whether they are going to focus 

on this aspect of their responsibilities or that aspect. So, whether 

it is customer service, or whether it is enforcement. 

And so, yes. Unless there are additional resources, a cut in their 

appropriations would adversely impact their ability to do their job. 

Mr. LEWIS. Thank you. Thank you, Mr. Chairman. 

Chairman BOUSTANY. I thank the Ranking Member. Ms. Black. 

Ms. BLACK. Thank you, Mr. Chairman. And I want to go back 

to the issue of the supporting documents. The chairman started to 

explore the documentations with the PEOs. But while many credits 

do not require supporting documentation to be submitted to the 

IRS, the small business tax credit appears to be especially complicated. And despite the fact of this complication, what, I think 8 

pages that they need to fill out since $435 million in credits have 

already been claimed, and the IRS does not require filers for the 

small business tax credit to provide documentation to support their 

claims. 

Would additional documentations—this question is for you, Ms. 

Ingram—do you believe that additional documentation would help 

the IRS to administer the credit and prevent any erroneous payments? 

Ms. INGRAM. Well, Congresswoman, we’re always looking for 

ways to prevent or reduce erroneous payments. It is important to 

remember about this credit that the credit that is available to 

small businesses is one of many credits that fall into the general 

business credit category. And those are not refundable credits. And 

we do not ask for attached documentation in most instances. And 

compliance is generally quite high. 

Where we are worried, particularly on the refundable credit side, 

we sometimes do ask for additional documentation. We did that 

with the adoption credit this year, because of the timing of having—when we could implement that. 

On the refundable side of this credit, which is what the tax-exempt organization small employer could get, we have not asked for 

additional documentation but we have put in additional filters that 

are particularly suitable for a refundable credit. So on the—where 

the risks are higher with refundable credits. And we do freeze 

those refunds and correspond, as needed, with that taxpayer. 

But more than 95 percent of the credits claimed—at least as far 

as we can tell at this point—are being claimed by the taxable small 

employers, and that is one of the many credits that goes into the 

general business credit. 

Ms. BLACK. So you don’t feel that you need any legislative authority to go further with any additional documentation. You have 


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all the authority you need right now, if you see that there is a need 

for additional documentation? 

Ms. INGRAM. I think we have—yes, I think we have the authority if we wanted to ask for more documentation. But we are also 

very mindful that additional documentation, in connection with the 

return itself, changes the dynamics around electronic filing, it can 

add burden to the compliant taxpayer. 

And so we try to use that very carefully, particularly when we 

don’t have information that shows that we have a real compliance 

problem, or where it is the type of credit or the type of refundable 

credit that might indicate a higher risk, and the need to do that. 

So, we try to balance those, those things. 

Ms. BLACK. Mr. George, could you also weigh in? 

Mr. GEORGE. Yes, thank you. As you are well aware, refundable 

credits are available to people, even—whether or not they have a 

tax obligation. And as Ms. Ingram indicated, it is the tax-exempt 

community in this instance that has access to this credit on a refundable basis. 

We have estimated that there are over $36.4 million in refundable credits that have been requested thus far, using this credit, 

and that overall, the non-business, so the non-refundable credits, 

are at around $379 million. 

I believe that additional information can be helpful, if it is used. 

The IRS requests a lot of information that it does not necessarily 

utilize. And so I share Ms. Ingram’s concern about overburdening 

taxpayers unnecessarily. But at the same time, again, any information that can help stem inappropriate requests, improper requests 

for the credit, that—will help the IRS better do their jobs. 

Ms. BLACK. Thank you. I yield back my time. 

Chairman BOUSTANY. Mr. Becerra, you are recognized. 

Mr. BECERRA. Thank you, Mr. Chairman. And to the two of 

you, thank you very much for the update on the information. 

We could get very technical sometimes, and when you go into the 

weeds you lose a lot of folks. But at the end of the day, what we 

are talking about is trying to figure out how to make a tax credit 

that is going to small businesses who offer health care to the employees work. And we need to get the information out there, because it is a new tax credit. These small businesses that have been 

filing taxes didn’t have this before. Many small businesses are 

making decisions on whether or not to offer to their employees 

health insurance to begin with. And sometimes these small businesses are trying to file their taxes without a lot of professional 

help, because it is expensive to get professional help. 

And so, it is good that we are doing a hearing. But Commissioner 

Ingram, as we have just heard, we can’t make—or can’t reach— 

conclusions yet without all the information to know how it is working best, where we can make changes. And I think, Mr. George, 

you would agree that once we have the full set of data that help 

us understand how this credit has worked so far, you can then 

come back to us and really give us some concrete ideas of how to 

make it work best. 

This, at the end, is a bridge. This tax credit is a bridge to get 

us to the point in 2014 when we have the full implementation of 


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the historic health care reform, so that small businesses will be 

able to offer to their employees real health insurance. 

Now, I just wanted to check on something. Small businesses are 

paying, on average, for health insurance for their employees, for an 

individual employee, something in the order of $5,300 a year. And 

if that employee has a family, and if the business offers an insurance policy for the family, it is about $14,000 a year. That is a 

chunk of money that a small businessman or woman who is trying 

to survive a business is making, in terms of a commitment to his 

or her employees. 

And I think all of us applaud a small business man or woman 

who figures out a way not only to make a profit, but at the same 

time to offer decent affordable health care to their employees. So 

this tax credit, which gives them some assistance to be able to offer 

that, or to keep offering that health insurance, is something we 

should try to really make work well. And so we thank you for your 

testimony. 

But my concern is this. And, Commissioner Ingram, you know 

this directly, because you work in the IRS under the Commissioner. 

If the Commissioner is sending us a letter essentially saying, ‘‘The 

budgets you are sending us don’t give us a chance to do the outreach, don’t give us a chance to do the enforcement’’—sometimes 

the enforcement brings to the American taxpayer savings of $7 on 

every dollar of enforcement we spend, because we are able to go 

after the tax cheats and so forth—that we do more harm for programs like this tax credit if we don’t give you the ability—which 

I think Inspector General George would agree is necessary for 

you—to police the activity of this new tax credit. 

And so, let me paraphrase what the Commissioner said in a letter recently to Congress. Cuts of the magnitude in their budget 

contemplated in the current appropriations bills would lead to noticeable degradation of both services and enforcement, and would 

have a serious detrimental impact on voluntary compliance for 

years to come. He goes on to give some specific examples of how 

this would hurt small businesses if we don’t provide the IRS the 

funding it needs to do its work properly. 

And so, I hope what you will do is let us know what resources 

you need, one, to make the credit less complicated; two, to do effective outreach to make the credit work for those small business men 

and women; and three, let us know what resources you need to not 

have this impact the work that you have to do not just on this tax 

credit for small businesses, but for everything else you have to do 

to make sure that those who are willing to voluntarily comply with 

the Tax Code do so in a way that isn’t harmful to them. 

It is hard for me to ask you a lot of questions, because the data 

you have is incomplete. But I do appreciate that you are willing to 

give us an update, and point out some of the areas where we can 

try to help you make this work. But I would hope that what we 

don’t do is make it harder for a business that right now is willing 

to offer health insurance to its employees at a time when times are 

so tough. We make it more difficult for them to take advantage of 

a tax credit that was meant to help them offer to American people 

who are working a chance to get decent, affordable health care. 


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And so, I appreciate your being here. I look forward to hearing 

from you again, once we have the complete data and can make 

some real judgements about the program. 

So I thank you, Mr. Chairman, for holding this hearing, and I 

thank the witnesses for having been here. 

Chairman BOUSTANY. Thank you, Mr. Becerra. Ms. Jenkins. 

Ms. JENKINS. Thank you, Mr. Chairman. Thank you for holding 

this hearing, and thank you both for being here. 

Proponents of the tax credit claim that it has been designed to 

provide an incentive to small businesses to offer health insurance 

to their employees. However, according to the Small Business Administration report released in September, this credit will primarily benefit those businesses that already offer health insurance. 

So, for both of you, from your experience with this credit, is there 

data available that could tell us whether the tax credit is being 

used by small businesses that otherwise have not offered health 

care? And do you have any data on the amount of small businesses—those with 10 or fewer employees—that offer health insurance coverage to their employees? 

Mr. GEORGE. Actually, I do not at this time, Ms. Jenkins, have 

that information. 

Ms. INGRAM. At the IRS we don’t have a good way of knowing 

who already offers health insurance. So the data question isn’t one 

that we can really help you with at this point. 

I think the key is when we go out and we ask people what their 

experience was in the first filing cycle, one of the things they mention is that because the act was passed in March, or toward the 

end of March, that many of them had already locked in to their 

health care decisions, because they tend to make—in the industry 

they tend to have calendar-year health packages for their employees if they have health care. 

So, what we have been told by small businessmen is that even 

if they don’t have health coverage today they will consider it. But 

we don’t’ have any data that would be responsive to your question. 

Ms. JENKINS. Okay. Well, thank you. If data becomes available, 

I hope you will share it with us. 

And Commissioner Ingram, the IRS agreed with TIGTA that the 

use of professional employer organizations pose a problem with regard to the small business tax credit, and it appears that this is 

a long-standing problem for the IRS. How do you intend to address 

the problem with regards to this credit? 

And, given that it is really not a new problem, are you confident 

you can resolve the issue so that the IRS can properly link employers and their employees? 

Ms. INGRAM. Well, Congresswoman, I always get a little nervous about getting too specific about methodology of finding problems, because I don’t wish to give anybody any ideas. But in the 

conversations with the inspector general’s team, and in the suggestions made in some recent reports as well as in this one, we are 

looking closely at what we could do administratively to make the 

kind of connections and the kind of crosswalks that Mr. George has 

mentioned. 

There are a lot of ideas, and we are working through the logistics 

of each one. I would say most of them cost money, and we need to 


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do it efficiently. And we also, as I mentioned before, need to do it 

in a way that doesn’t throw taxpayers who have no problem into 

a filtering system that creates work for them. 

So, I think there are some things we can do. We are working on 

the logistics and the ideas that we continue to throw back and 

forth between our teams. 

Ms. JENKINS. Okay, thank you. Inspector General George, this 

hearing was designed, I think, to highlight the complexity of the 

tax credit as a key factor as to why small businesses maybe have 

not raced to embrace the credit. This is despite TIGTA’s findings 

that the IRS made extensive efforts to implement the credit. And 

I think our next panel, we are going to hear from small business 

men and women about the burdens that they are dealing with. 

But I am just curious, Mr. George. This tax credit also puts an 

administrative burden on already scarce resources for the IRS. So 

can you elaborate on the amount of time and effort the IRS has devoted to administrating this credit, and if you have any ideas on 

what we can do to simplify it? 

Mr. GEORGE. Yes. I would just simply elaborate on a point that 

I embraced earlier. When I made reference to the IRS expending 

$1 million trying to alert people as to the availability of the credit, 

that $1 million was spent simply on sending 4.4 million postcards 

to taxpayers. So that was just the start of this. 

Again, they have requested almost $25 million in the most recent 

appropriations to help implement this credit. And I would simply 

note also again—this goes back to an earlier point that you 

raised—the IRS did a lot of focus groups. They did good outreach 

to people. And a lot of the responses that they received was that 

this is such a complicated credit in which to implement, that a lot 

of their customers were uncertain as to whether the cost benefit 

analysis really paid off for them. 

Ms. JENKINS. Just to clarify, so have we requested nearly $25 

million to implement a credit that in 2010 was supposed to cost $2 

billion? 

Mr. GEORGE. That is my understanding, but I think I would 

defer to Commissioner Ingram for the exact figure. 

Ms. INGRAM. The President’s proposed budget had about $24 

million—something like that—in it, which was requested in order 

to work on the examinations coming out of the first cycle, as well 

as to work with the second cycle of filings. It also was to cover the 

work around the adoption credit which, as I mentioned earlier to 

Congresswoman Black, was—did involve additional documentation 

and a much different process. 

Ms. JENKINS. Okay, thank you. I yield back. 

Chairman BOUSTANY. Dr. McDermott. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. I am pleased that 

we are having a hearing, but I am not quite sure of the value of 

it, because I learned very early—I think it was in geometry in 

about sixth grade—that with one point you can’t draw a line. You 

have to have two points or three points or four points. And the only 

points we have are 228,000 and then 309,000, which looks like 

things are going up. So I think that it means that more people are 

taking advantage of this. 


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But what I am struggling with is trying to figure out how do you 

get a credit like this known by the small business people in this 

country. These are people with 25 or less employees and their employees are paid less than $50,000, on average. And they are struggling to keep it together in the worst economy in years. And so 

they get a card. 

Now, I don’t know how many people have ever received a card 

from the Federal government that they didn’t pay total attention 

to. Or, how many of you received a political brief from somebody 

on a card that you didn’t pay total attention to? But you send out 

four million cards. 

Now, I understand that you sent them to businesses under 25 

employees, and average salaries of less than 50,000. But you had 

no data about who had or who was offering health insurance. Is 

that correct? 

Ms. INGRAM. That is correct. 

Mr. MCDERMOTT. So, a tax credit aimed at people who are offering a tax credit, and one that is in the middle of a year, they 

are going to get a card in July. People are saying, ‘‘What am I getting a card in the IRS in July about?’’ Because this says something 

about tax credits. ‘‘I am not filing until January,’’ or whatever. 

Give me a better design to get it to the people who would benefit 

from it. Because it defies my understanding of why somebody 

wouldn’t want to figure it out if they could save money, if they 

could get 35 percent back of their premiums that they have paid, 

why wouldn’t they apply for that? 

I mean what should have been done to make it better? How 

would you make it simpler—help us. 

Mr. GEORGE. Well, Mr.—if I may? 

Ms. INGRAM. Go ahead. 

Mr. GEORGE. Thank you. The community which, for the most 

part, would take advantage and be involved in this credit is such 

that they most likely would use tax preparers. And so, it would 

have behooved the IRS to focus their efforts on reaching out to tax 

preparers, the tax preparer community, and they have done that. 

But, that focus, whether it is through the national tax annual 

programs they put around the country, or through more directed 

mail to groups that represent tax practitioners—the National Association of Tax Preparers and the like—to help spread the word, 

there could have been much more of a targeted approach here, I 

think, that would have helped address the question you are raising. 

Ms. INGRAM. Yes. I think that one reason we turn to the postcards, any time there is a new piece of legislation and—that is immediately effective, and we are worrying about how do people, A, 

know about it in the first place, and then who is—who needs to 

know detailed information about it and how to do it, and so forth, 

we have tended in the small business community to look at—the 

small businesses need to be aware, but they tend to turn to their 

practitioners and advisors to solve it for them. So, we have received 

anecdotes of practitioners telling us, ‘‘Yes, my client brought me 

the postcard.’’ 

So we tried to do a two-prong track during 2010 to get both of 

those needs addressed, both awareness and the professional ability 

to assist their clients in figuring out what they wanted to do as a 


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business. Because some of those decisions needed to happen during 

that year, we were anxious to do that outreach ahead of what we 

might normally do with the filing season cycles, and that is why 

we acted—— 

Mr. MCDERMOTT. Okay. So in about a month or 2 months, we 

are going to start a new filing season. And all the filers, now all 

the preparers, will have had 2 years to know this exists. Is that 

correct? 

Ms. INGRAM. They have been through one cycle and be starting 

their second cycle. 

Mr. MCDERMOTT. They will be starting their second cycle. And 

they will have had at least one notice from you. Have they had any 

further notices about the fact that this tax credit exists? 

Ms. INGRAM. We haven’t done direct mailings of the same kind, 

but we have tried to be very visible out at conferences and programs. We have tried to do cost-effective tools like webinars for 

busy practitioners and small business men who have trouble taking 

time away to go to a conference, and we have tried to increase the 

kinds of materials from alert flyers, all the way to how-to kits that 

are available for practitioners to use themselves or with their clients. 

This evolution of the materials that we have been developing and 

the outreach we have been doing is very much in response to the 

feedback discussions that we have had with small businesses themselves, as well as with the practitioner groups. 

So the advice that we have received, consistent with what Mr. 

George said, was, having done the awareness to a certain point, to 

turn to the professional channels and focus on tax practitioners, 

those assisting businessmen in decisions around insurance products, and the software industry, to see if through tools like different software or different return filing mechanisms, things could 

be made more clear and easier for the businesses themselves. 

So, that is our shift from the first filing cycle to the second filing 

cycle to try to reach the right people and leverage that. 

Mr. MCDERMOTT. So we need another hearing at another time 

to find out the results of your efforts. 

Ms. INGRAM. Whenever you would like to ask me to come, sir. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

Chairman BOUSTANY. I thank the gentleman. Mr. Marchant. 

Mr. MARCHANT. Thank you, Mr. Chairman. We are all going 

through tough economic times now. We are trying to reduce the 

Federal budget, the spending cuts. That is what we have been sent 

to Washington to do. In these hard economic times, all of the government has to find a way to work more efficiently. And the IRS 

will be no exception. 

What is the IRS doing on trying to stop fraud on this particular 

credit that is being requested? Ms. Ingram. 

Ms. INGRAM. We have a two-prong approach, sir, on this credit. 

One is designed around the non-refundable credit, the one that is 

going to more than 95 percent of the people claiming the credit, the 

business side, and an augmented methodology that we are using on 

the refundable credit side with the small exempt organizations or 

employers. 


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All the returns go through certain kinds of checks that are the 

same for both groups. And these involve filters and checks that are 

a comprehensive set developed based on all of our experience with 

other kinds of credits, including advice that we received from people like TIGTA and GAO. 

And then, on the refundable side, we add certain additional filters that might be particular to that type of community, that type 

of group, because those—with the refundable side, we are pulling 

before payment is made. 

Mr. MARCHANT. Yes, sir. 

Mr. GEORGE. Mr. Marchant, if I may, again, while they are 

doing yeoman’s work in certain areas, this is an Achilles heel for 

the Internal Revenue Service. If they don’t address problems—and 

especially in the refundable credit area—at the outset, during the 

processing of it, the moment the credit goes out the door it changes 

the dynamic of the situation entirely, in that it costs much more 

to try to recover dollars that have already been sent out the door 

than it would to prevent them from going out in the first place. 

And so, again, while this is a tax policy issue, and we touched 

on this earlier, if they could buttress up their math error authority 

policies in both this area and elsewhere, that would allow them to 

prevent—make corrections to tax forms before they go out, as opposed to having to subsequently audit and/or reach out to organizations and individuals who inadvertently received or erroneously received tax credits. 

Mr. MARCHANT. With the time I have left, the biggest concern 

I have about this tax credit was when the Administration was selling this affordable health care act to the public, millions of small 

businesses heard the message that they were going to get a tax 

credit, they were going to benefit if they provided health care for 

their employees. Yet when we are given an explanation of this tax 

credit and given this chart, I don’t know of a small business in my 

district that would look at this chart and say that this is a simple 

tax credit. 

And my biggest concern is that the compliance, the cost that it 

would take for a small business to employ an accountant to simply 

navigate through this chart and navigate through the qualifications, in many cases, would far outstrip any savings that they 

would get from the credit. So I think it is a testament to the complexity of this, the Code, to say that 4.4 million people were told, 

‘‘You might qualify by it,’’ and 309,000 claimed it. 

Do you—have you figured out what the average tax credit issued 

to an applicant that takes advantage of it is, Ms. Ingram? 

Ms. INGRAM. I tend to be somewhat allergic to raw data, but 

it is several thousand. And it depends very much on the situation 

of that small business. I have heard from small businesses that 

they received 5,000, and I have heard from small businesses that 

it has been smaller. So it very much depends on where they land, 

in terms of their size and the kinds of premiums that they pay. 

Mr. MARCHANT. Thank you very much. 

Chairman BOUSTANY. Mr. Paulsen. 

Mr. PAULSEN. Thank you, Mr. Chairman. And thanks for holding this hearing. It is pretty clear from some of the discussion testimony this morning that you have a tax credit that small businesses 


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were probably primarily hoping to take advantage of, and it is obviously the folks that are taking advantage of it or using it is substantially lower, or significantly lower—surprisingly lower—than 

was ever expected, about 8 percent of those that are eligible. 

I know we are going to hear from some folks in the next panel 

that will be able to talk a little bit about why that might be the 

case, but I want to dive a little bit deeper. And I assume a lot of 

it is about the complexity, but I do want to follow up a little bit 

and ask this question. Because it does seem that it is the burden 

perspective that is one of the reasons why companies are not participating in it. 

And I just—I remember I spoke to one small manufacturing company in my district about health care in particular, and to its credit 

this company does provide health insurance for its employees. And 

like many companies, this company is seeing its health insurance 

rates go up. But I think the reaction that I heard from the leaders 

that I talked with at the company when they say, ‘‘Look, we are 

covering our health care costs, we wish Congress would address the 

cost issue, but we are not going to participate in any of the potential benefits in the new health care law, because we are not convinced it is worth the time and the effort to participate in these potential benefits.’’ 

And so, I mean that is of concern. I think it adds to the whole 

factor of uncertainty and how companies are investing in their people and in their equipment in the down economy. 

But let me do this. Let me ask this question, because we talked 

a little bit about fraud and accuracy. I want to dive a little bit 

deeper. Mr. George, in the report on the IRS efforts to implement 

the small business tax credit, you discuss the problems with tracking employees when employers are using these professional employer organizations. Can you explain a little bit about exactly 

what the problem is in regard to the credit, and how the IRS can 

fix the problem for—when these organizations are actually used? 

Mr. GEORGE. Yes. One of the points that I raised earlier was 

simply having the IRS have the ability to cross-check the Employee 

Identification Number between the PEO, the Professional Employer Organization, and the entity which they are representing. 

Now, I don’t know whether or not the commissioner thinks that 

the IRS needs legislation in order to accomplish that. But again, 

we recommended that over 2 years ago in a report that related to 

this. 

Going back to your point about complexity, sir, what we have 

found in our study of this matter is that the taxpayer, in order to 

take advantage of this, has to determine which employees may be 

counted for credit purposes, what constitutes a qualifying arrangement, determining the number of FTEs for the purposes of the 

credit, determining the annual wages for purposes of the credit. 

The premium payments for purposes of the credit are capped, so 

they have to make sure that they don’t exceed that. The phasing 

out of the credit, if the number of FTEs exceeds 10, and the average amount of wages exceeds $25,000, as you pointed out, and then 

the effect that state and local credits have on the overall issue. I 

mean that is a factor that needs to be taken into consideration. 


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So, I know there—this is an extraordinarily difficult credit to implement. Very few people would be able to do it without the help 

of professional preparers. But I will, again, yield to the commissioner. 

Mr. PAULSEN. Well, and let me just—because it sounds like, 

okay, there is complexity, obviously. But if the math is correct on 

the form, the company could be complying from the math perspective but there could be erroneous—not fraud, potentially, but erroneous reporting based on these professional service organizations 

that may be employing the individuals, rather than the true small 

business. 

And so, I mean, how do you get away from doing an actual audit? 

You know, Ms. Ingram, Commissioner Ingram, how do you get 

away from doing an actual audit? Does the IRS plan to audit more 

companies, more businesses? And, in particular, now that tax-exempt entities are eligible for this credit taken against income, 

which has not been a practice in the past, from what I understand, 

with other credits, I mean, does the IRS plan to audit and increase 

audits for tax-exempt entities? 

Ms. INGRAM. Well, one of the interesting things on the tax-exempt entity side is, because that is a refundable credit and we have 

additional filters involved, we have been very interested in what 

kinds of folks are getting kicked out by those filters. 

And so, learning from the profile, the demographics of which organizations seem to be hitting filters on that side has been important for us to monitor and to figure out how to tweak or cross-check 

those filters to make sure that we are getting the folks who do appear to have a reason that we should correspond with them prior 

to payment, and those which are getting caught up, and which we 

could resolve without contact. 

A good example would be—is if you were going to check certain 

databases about an exempt organization, you might find that a 

church that has no requirement to apply to be exempt, nor a requirement under the statute to file an annual return, might get 

kicked out and yet is filing an employment tax return and has the 

right range of employees and wages. 

So, that is a good example of kick-outs where we want to look 

at what is getting kicked out, and make sure that we are calibrating it to fit what really needs to be pursued—— 

Mr. PAULSEN. And, Commissioner, I know my time is just out. 

But can you just tell me, so does the IRS intend to do increased 

audits of tax-exempt entities as a part of this now? 

Ms. INGRAM. If a tax-exempt entity has claimed a credit that 

we can’t be comfortable with, we will correspond with them prior 

to payment. 

Chairman BOUSTANY. Mr. Kind. 

Mr. KIND. Thank you, Mr. Chairman. I appreciate you holding 

this important hearing. Hopefully, we will have another opportunity at some point to reconvene and have another hearing and 

an update because I think, in a lot of respects, it is a little premature. Obviously, the credit didn’t take effect until last year. The 

Affordable Care Act didn’t pass until March of last year. We are 

still waiting to see all the small business filings coming in, and the 


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impact, who is going to take the credit. So, in some respects, it is 

a little bit premature. 

But let’s get to the complexity a little bit, because I think we all 

have a shared goal. When you take a look at the number of uninsured individuals in this country, the vast majority of them are 

working people in small businesses. In fact, for small businesses 

the size of three to nine employees, less than half of them are offering health care coverage for their employees today. 

So, if we are going to be serious at all about trying to attack the 

number of uninsured, you have to do something to deal with small 

businesses to make it more affordable. And that is why, in previous 

years, there has always been bipartisan support for providing tax 

relief to small businesses and providing health care coverage for 

their employees. That is what we are trying to attempt here. 

Now, if there is a problem with complexity, let’s address that and 

come up with some recommendations on what we can do to tighten 

it up and make it less complex. That is what I hope we can try to 

accomplish at a hearing and the feedback that we are getting. 

But, Mr. George, based on your study and analysis of the credit 

so far, have you offered any recommendations on how to simplify 

the tax credit to deal with the complexity that is out there right 

now? 

Mr. GEORGE. Again, it is the Secretary of the Treasury that has 

delegated substantive tax policy to the Office of Tax Policy. And so, 

I am not here to advocate any particular—— 

Mr. KIND. Right. 

Mr. GEORGE [continuing]. Substantive tax policy. That said, 

something as simple, again, as math error authority, expanding 

it—— 

Mr. KIND. Sure. 

Mr. GEORGE [continuing]. So that—to keep the IRS from having 

to send out money when they know there is a problem, and yet 

they don’t have the authority to keep that money from going out, 

which would be a simple solution to this. 

Mr. KIND. I am talking from the employer’s point of view, trying 

to simplify so that it is easier for them to take advantage of the 

tax credit. 

Mr. GEORGE. Well, when you—— 

Mr. KIND. Are there any recommendations that you have there? 

Mr. GEORGE. Well—— 

Mr. KIND. Ms. Ingram, has IRS been looking at this at all, as 

far as steps that we could take to try to simplify it, or can IRS do 

it on your own? 

Ms. INGRAM. I think that what we have to do, from our perspective, is look at whether we can simplify forms, simplify instructions, get better how-to kits in people’s hands, help them with decision trees to reduce the number of questions they need to ask 

themselves. 

Many of the portions of the provision are getting at more complicated business arrangements, and not everybody needs to—— 

Mr. KIND. Right. Well, Ms. Ingram, just for the sake of clarification now, it is not mandatory that a taxpayer complete the worksheets and the instructions in order to claim the tax credit. Is that 

right? 


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Ms. INGRAM. Absolutely. 

Mr. KIND. Now, just so I am clear—and I have my own calculator on my website for small businesses to plug in information to 

see what they could qualify for under the tax credit—check me if 

I am wrong, but is it basically three pieces of information a small 

businesses owner is going to need or provide the accountant in 

order to take advantage of the tax credit? One, individuals considered as employees; two, employee hours of service; and three, employee wages paid. Are those basically the three criteria that they 

are going to need to plug in, in order to determine their tax credit 

under this? 

Ms. INGRAM. That is where most of the math questions are, yes. 

They do need to make sure that the insurance they are providing 

and the employer’s share of the contribution also meets the rules. 

Mr. KIND. And that is the 50 percent rule. 

Ms. INGRAM. Yes. 

Mr. KIND. And most states, like Wisconsin, already require that 

at the state level. So, that is not a problem. I mean that is something that already applies. 

But those are basically it. And I can’t think of a small business 

owner who wouldn’t know that data or those facts that they could 

just plug in. Otherwise, your business probably isn’t going to be 

open very much. If you don’t know how many employees you have, 

how much you are paying them, and how many hours they are 

working, there is a problem, I think. 

Am I missing something here? Is it more complicated than that? 

Ms. INGRAM. I think the thing that we have been trying to listen to when we talk to stakeholders and small businesses and advisors is to try to hear where they would like assistance, where we 

could make it simpler, where we could say, ‘‘Answer these couple 

of questions, and if the answer is yes for each of them, go straight 

to’’—— 

Mr. KIND. And the only reason you see a chart like this is just 

to score cheap political points and to confuse people. I mean realistically, this is what this is all about. But do you know, Ms. 

Ingram, how many small business owners that are filing taxes 

have a paid preparer, professional preparer, doing it for them? 

Ms. INGRAM. I don’t have the exact statistic, but it is high. 

Mr. KIND. It is pretty—— 

Ms. INGRAM. It is high. 

Mr. KIND [continuing]. Pretty high number. Right. 

Ms. INGRAM. Yes. 

Mr. KIND. And they are the ones who are supposed to have the 

expertise in being able to take advantage of all the credits, all the 

deductions that small business owners can claim anyway. Is that 

right? 

Ms. INGRAM. Yes, it is why we are shifting our strategy for outreach for the next cycle, to include the—— 

Mr. KIND. Professional preparers. 

Ms. INGRAM [continuing]. Tax preparation industry, the electronic industry, to see what they can also do. 

Mr. KIND. Great. Thank you. Thank you, Mr. Chairman. 

Chairman BOUSTANY. Mr. Reed. 


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Mr. REED. Thank you, Mr. Chairman. Mr. George, your point 

was very well taken about chasing the money once it is already out 

the door. That is a very practical point. Coming from a small business world, I know exactly what that issue relates to. 

So, my question actually is to Ms. Ingram. You talk about the filters as being kind of a primary tool—if I am hearing your testimony correctly—the filters being the primary tool to prevent that 

from occurring. Can you just articulate what are you—what kind 

of filters are you deploying? How are you determining those? What 

are you—how does that process work? 

Ms. INGRAM. I will try to be responsive, but again I am going 

to be a little cautious about specificity. 

But the—for all returns we do a certain number of layers of validating the return itself, of looking for basic indicators of fraud that 

might be, for example, of interest to our criminal investigation 

unit. So there is sort of the basic process that returns go through. 

In addition, we have a set of filters that are designed around 

cross-checking secondary information inside the service, information that we would not be able to use the ordinary type of math 

error to address. And, depending on whether it is refundable or 

non-refundable—because historically, the risks are quite different 

in our experience—we either use the additional filters to kick out 

any real outliers immediately, but otherwise to identify cases in 

which we would like to correspond, even if the return is processed 

first. Whereas, on the refundable credit side, we do all of that before any dollars leave the house. 

Mr. REED. Okay. And then, so what kind of success rate are you 

demonstrating with utilizing those filters, for example, on this 

credit? How are you—what is the metric that you are using in the 

agency to determine whether the filters are working or not? 

Ms. INGRAM. Well, we do that a couple of ways. And really telling how well they are working here is going to take a little bit of 

time. 

One of the things we looked at in designing our program was the 

work that we had done around the COBRA issue a couple of years 

ago. And GAO actually came in and looked at our filters there, 

threw some fake test cases at us, which we caught all of. So we 

thought we had a pretty good methodology developed through that 

experience, thought we had gotten some good advice in that case 

from GAO. And so we took a similar approach here. 

In the general business credit area, as I mentioned before, we are 

just not seeing the big issues in the early kick-outs in this return, 

in this issue. 

Mr. REED. Okay. So then, beyond filters, what other tools are 

being utilized to make sure that it is being monitored appropriately? 

Ms. INGRAM. Well, the filters are particularly good for up-front 

identification, and the trick always is to get the filters right, feedback from our own observations, as well as from our oversight bodies. 

The other thing is to check on whether the filters are effective 

is also to sample and look at some returns, some of which went 

through filters and some of which did not kick out. There are various ways in which we try to look at sort of control groups—I don’t 


dkrause on DSKHT7XVN1PROD with HEARING
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know what you want to call that—to see what is being caught and 

what didn’t get caught. 

Mr. REED. Okay. Mr. George, did you have any additional information on that? 

Mr. GEORGE. Again, I am repeating from my oral statement— 

the IRS does have a program to attempt to identify taxpayers who 

don’t file employment tax returns, and yet might still be able to 

have this legitimately paid by a PEO, the Professional Employer 

Organization. But the IRS truly can’t tell the difference between 

whether or not the PEO had the responsibility to comply with this, 

or that the employer does. 

And so, when it is something that basic that they still can’t determine, it is troubling. It is problematic, and I think would lead 

to more difficultly. 

Mr. REED. And that is a great point, because that would be— 

that would seem to me to be a very simple check. If you are doing 

the payroll tax and you are filing that, that you would match that 

up with the provider. What is the barrier to that? What am I missing? 

And that seems like a very simple—Ms. Ingram, what am I missing, why that doesn’t match up with each other? 

Ms. INGRAM. I think the issue is if one of our filters for the 

small business is to compare their information about this credit 

with their employment tax filings, and if they have hired a firm to 

do that for them, the information may be in the system under two 

different employer identification numbers, and it is the connection 

that Mr. George is referring to. 

Mr. REED. So how do we fix that? How do we fix that, Mr. 

George? 

Mr. GEORGE. Their computer systems need to be updated. 

There is no question about that. That would seem like low-hanging 

fruit, but it depends on the resources available to them, and their 

priorities. 

Mr. REED. All right. My time is up. Thank you, Mr. Chairman. 

I yield back. 

Chairman BOUSTANY. I thank the gentleman. Inspector General George and Commissioner Ingram, we thank you both for 

being here today and for testifying in front of the Subcommittee. 

Please be advised that Members may have written questions they 

would like to submit to you, and we would ask that you respond 

to those, and they will be made part of the official hearing record. 

And with that, we will conclude our first panel. Thank you. 

Mr. GEORGE. Thank you, Mr. Chairman. 

Ms. INGRAM. Thank you, Mr. Chairman. 

Chairman BOUSTANY. I will ask the second panel to come up 

and take their seats. 

I would like to welcome our second panel. We have Ms. Patricia 

Thompson, who is with the American Institute of Certified Public 

Accountants, and is chair of its tax executive committee. We have 

Mr. Todd McCracken, who is the president of the National Small 

Business Association. And Mr. Hisel is co-director of Home Resource. I want to thank you all for being here today to testify in 

front of the Subcommittee. 


dkrause on DSKHT7XVN1PROD with HEARING
49 

You will each have 5 minutes to present your oral testimony, 

with your full written statement being made a part of the official 

record. And, Ms. Thompson, we will begin with you. 

STATEMENT OF PATRICIA THOMPSON, CHAIR, AICPA TAX EXECUTIVE COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED 

PUBLIC ACCOUNTANTS, WASHINGTON, DC 

Ms. THOMPSON. Good morning, Chairman Boustany, Ranking 

Member Lewis, and Members of the Subcommittee. My name is Patricia Thompson, I am a CPA and chair of the AICPA tax executive 

committee. I am also the tax partner at a small CPA firm in Rhode 

Island. And I would like to thank the Subcommittee for the opportunity to appear at today’s hearing. 

This credit was designed to encourage small businesses and 

small tax-exempt organizations to offer health insurance to their 

employees for the first time, or help them afford coverage they already have. The AICPA does not have a position supporting or opposing this incentive. My testimony today is based on our members’ 

experiences with working with small businesses, and will focus on 

the technical aspects of the credit, and address how they can be improved to make the exercise of the tax credit simpler and more 

transparent. 

The AICPA has a long-standing tradition of advocating for sound 

tax policy. The tax law should be simple, so that taxpayers can understand the rules and can comply with them correctly in a costefficient manner. 

Transparency is an important partner with tax simplification. 

Transparency is the basic notion that taxpayers should know, 

namely, that a tax or a tax incentive exists, and how and when the 

tax incentive applies to them. 

Based on our members’ experiences working with small businesses, we believe there are a number of areas where the new code 

section 45–R could be made simpler. We understand the challenges 

Congress faces as it tackles the complex issues inherent in drafting 

tax legislation, and appreciate your diligence in trying to do the 

right thing for taxpayers. 

The IRS should be complimented on providing guidance on the 

application of the credit, and also on informing taxpayers and tax 

professionals on the availability of the credit. 

Since most small employers did not know until the end of the 

year or later, when their tax returns were prepared, whether or not 

they qualified for the credit, there was less incentive for them to 

provide health insurance coverage. Also, many of the variables, 

such as the number of full-time equivalents and the hours worked 

per employee are difficult to estimate early in the year. It was not 

very helpful for most employers with 10 or more employees to 

begin testing eligibility or potentially calculating the credit before 

the end of the year. 

Many taxpayers found the credit to be quite complex, because the 

definitions of ‘‘eligible small employer,’’ ‘‘full-time equivalent employees,’’ and ‘‘employee’’ are not straightforward or consistent with 

other definitions in the Code. For example, the definition of ‘‘eligible small employer’’ was unique to this provision. The business was 

required to accumulate information sometimes not readily availVerDate Mar 15 2010 08:09 Jan 23, 2013 Jkt 076181 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\76181\76181.XXX 76181

dkrause on DSKHT7XVN1PROD with HEARING
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able, and perform several complex calculations before it knew 

whether or not the provision applied to them. 

It is also necessary to evaluate each qualified health plan to determine if the employer makes sufficient non-elective contribution 

on behalf of each employee, as well as determining the premiums 

eligible for the credit. 

Other complexities include the calculation of the number of fulltime equivalent employees, and the phasing out of the credit, once 

an employer’s full-time equivalent count exceeded 10, or its average 

annual wages exceeded $25,000. For small—some small employers, 

it was not uncommon this year for tax preparers to have spent a 

significant amount of time necessary to prepare an entire small 

business return, just on the credit calculation, only to find that the 

client did not qualify for the credit. 

The AICPA believes the tax credit should be simplified. We suggest that you consider changing the definition of a small business 

to either base the definition on gross receipts or employee count 

from the prior year, or the average of the prior two years. Prioryear information would be readily available, allowing small businesses to calculate early in the year the tax savings for purchasing 

or continuing the health insurance. 

We also suggest that the phase-out calculations for the employee 

count and the annual salary be eliminated. Phase-outs create difficulties in estimating an employer’s benefit from purchasing or 

continuing to provide health insurance coverage. We appreciate 

your efforts in examining some of the difficulties that businesses 

face in navigating through the rules of this credit. 

Thank you again for the opportunity to testify, and I am happy 

to answer any of your questions. 

[The prepared statement of Ms. Thompson follows:] 


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dkrause on DSKHT7XVN1PROD with HEARING76181A.022

AM EK ICAN I NSTITUTE: Ot' C [H:TI t'1[ O 1'11UI.IC ACC01J lIiTANTS 

T[H 10 NV UEt"OKE TilE 

SUBCOMM rrru; ON OVt:RS IG IiT 

COM,\l llTEE: ON W .... yS .... N I) MEANS 

U.S. IIOUSE OFREI'RESENTATn' ES 

il EA RI NG ON SMALL BUS I,"; ESS II EA I.TH INSURA,..;n: TAX CREDIT 

NOVEMBER 15,211 11 

Good nlonlinl\ Chainnall 1l0uSI.ny, Rankillil Member Le"i. and Melllb.", of ,h. Subeommiu.,.,. 

My ""me is I,.!rida Thompson. I 3m a CI'A and Chair of I/I~ Ta~ Eso<U!i<e Commfll.o of Ih~ 

Am .... ican In ~lil ul< ..,fCcnir,fit Pub(ic Accnun"'MS ~A CPA'·I. My !tS im"o~ ,oW.)' is blI.""d QrI ')\ir 

n'"mbe",' exrcricnccs ""rking with smull hu.in,'sl dientS, I am Ihe " "' I'anner .1 .c~rdli, 

Gilslei" & Compan)', LLr, a CPA r,rm in I'ro<idence, Rhode sland.~nd h"'. been wilh 111<: lim, fur 

<Jvcr 3:! ),ea"" I would i~e to Ihank ,his Sube"mmiuee fol' ,h~ OfIpoMuni,), '0 appear a, Lodo)"$ 

h"Mng'm Lhe hlll'lemenlalinn and clkcli«en.~s oFLhc ~nal\ t>usine~ lth illsur:>ncc IH <rtd[l, 

The small business neal,lI insul"~nce I.x "",dit, cnaCh.-d 3. p~rt "rille l'ali.",1 I'rille,.,ion an.! 

"ffordable 0.", Ac,'. wl!, de~igno.>d 10 "1IcouMlg" s.mall busi""sses nd ,;mall ta ~ .x~mpl 

"llIani,,,,i,,,,. to olTer health i~"urancc co, er:ll!~ to Iheir emp\oye~. ror ll1e Ii .. , time or help Ihom 

~fford tonrago.' 1M)' .I",ad} han. The AICP" does nO' haw a posilion ~uppoMing or oppos;n~ Ihis 

I,." incellli, •. Ilo"c ..... , in Ill} l.slim",,) lod3)" I pl8n to focus"" 'he l""h"i"81 aspecl<OFlhc =di, 

BOld odJrtlS Ip<'<'itk pro'i~ions of Iho o,fitII from <o,nplcxi,y and lta" sp.,en<y rcrsr.<~ljves, l obo 

will Wa ... rea l life <""ntples of th~lI"nl:es m~lI cmploy"rs facod ,h; ~ ) car in oiln., d<'ormininj; 

whclh ..... tllc)' wcn: eligible ror the "redilN e~lcula\ing Ihe e,'Cdil i,.elr. 

SOUND 'r AX l'OL1CY 

T he AICPA has " I.mgslandlng I,.~d li\)ll Ilf aJ\'\lC,,,jnll for ljUund I~~ f'('1;ey. In Ihal rt!,\llrd, ,h. 

AICrA h", dcvclc[II!d lIIX policy concept ".,cmen ... "od pUbli!hed n'~lenBI on fundonlental 1.0" 

",fonT!, One sib"tficant j;uidIMi principle or good \a~ policy is simpllei!)', The I"'~ I." should be 

.i",ple.o LhaliaXp.1)'e,. ca" undc,"!and Lhe. ml .. nnd <an mmply with !h~m ':o""cll), and in ~ coS(-

~Jljdent m: .. m~r, Th. ~u;di nR prlncjpl~" rur ta ~ ')"'Jllili ealion on: 

\1) Seck .impl~SI "ppmoch~., Once lax lawmakers identity dC1;il'<'J la.' pol;c~ or rtV~"u~ 

objeclives. lhe :<impl"'" ond m<»llraru;p<lrtn1 .pprooches 10 imrlem!>n!a,ion should t... SOllgtu, 

12) Minimizc oomJlli~nce bllrd~ns, C!lmpli" nc~ costs. in le""S of 001/1 lime and ",on~y, should 

be mlnimiz~d and ~hould II<' <ommen,urnl. wi,h Ihe rtsnUrt~" IUId abillli~" of 'h~ ~ff~-,: '~d 

la~pa}"rs, lligil.r "npli""cc c ...... may be apPrilpti,le ror ''<1m riel( bus;!less .1Id i"\'t"m~m 

lransa<'1iOIlS, wt nQI for small busIMs",,~and sn,alll'~ CXC<opl o,,,~nimlion , 

PI R .. duc~ f'~'1u~"cy of I:.X I:.w eh""I'''. Cha",\;e in and .,1' i"",lr inC"""5eS c"mrl""il~ in Ihe 

"hon run. even if Ihe changc .. ill p",du~e Itong-tcrm simrlilie"li(ln, Tax I ... , !h" uld be 

changed only lO address changes in revenUe noe&.. 10 ;"'pl.mom ~igniflc.nl chal1g.~ in laX 

poli.)', 01 10 alleviale e~i .. il\ll c"mple~ilics anJ incon.inenci.s, 

' Pub. L, No, 111_1018, 114 Sial. 119 ~OI(l . 
52 


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lIIePA', Wriuen T~ .. timony for \h~ RC~(lrd 

Sul>l'ommi((c .... on O\wsig.hl 

C""'miu"" 00 Ways and M.ans 

Ilearing Of! Small Businc •• I-Ieahl! Insurnocr 1'".~ Credit 

PAge:< on 

(4) U$<' c()11siSlrm ~On"Cpl$ and definitions. Inconsistrnd~$ in Icg~1 CQnccplS and definitions 

$hould b< ~Iimin"ted in rxi!llng I~w Hnd Dvoilk'<l in the draflini of new I.ws. 

(5) COll~idcr adminlslllul"e hurden •. The ahi!ily nrla~ agencies 10 adminislU, pffivide guidance 

on. and enfo.ce the I~w muSI b< ton!idered in the de,-elopmenl of leglslntion and 

~dminisu"li\"c iuidance. 

(6) An,id Ilmil~d a(lplicllbl!ily_ Ta.~ rulc~ Ihal ~flpl}' 10 a limiled sel (Irla~pay~ .... or Iii, Qnly a 

sIlon I"'riod ufti",e .hould l1e-avoided. 

Tr:tnSfl"reo<:y, unother guiding prin~iplc or g,<K>d \a~ p<)llc~. is (In ionpllnM\ pan"",. "ith lax 

simplification Transparencr is the basic OOIiun Ihul I~~p.ye-tuoou d know. namcl~. (I) Ihat _ la~ or 

lax Incentive exisiS and (2) how and when 1M lax or I"" iOlCe nlive applic .. 10 Ihem. The more 

Com pie/< a la~ ~)'. tclll is, lhe less \r>ln:;pu.renl itlend~ 10 be. COlllpluily ob>;cu.-..s bow. When. and on 

who,,, • lu ill imposed (,,' a tal< inC,,"live 15 ~""ilnb!~). which inc=st~ confusion, fru~lral;on. Rnd 

lhe p<'rceplion Innllhc t.~~ s~Mem is unfair. In addilion. ohscurily in Ih~ tax law may oa ~ hann by 

making it dif!icult fur la~p.y",. and lhe'r 18:< odvis;c~ to plan Irnn)8ot;oos and comply wilh the Jaw. 

Wilh .... Gard 10 Ihe he~hh Insuranc~ la' l>rtdil, unlnl"-nli",,"1 ,"il-$I"lcn,cn! ~ In lhe crNIil m~~ resuh 

",hen lhc pmvisi".,'s applicabilily is not dc.T. 

Llstoo below a .... the ,"uiding pr;ncipk~ for tntllSp",...n.y: 

(I) Make the promull!BI;on of a good lu system 8 priority, iraosp=""y j~ cxp«ted 10 

.chiov." fair laX low. iml'I'Q".d compJiance and .. h~althy econ\llnicen"ironln~nl, 

IZ) Implement tmnsparenl appr""ch. . 'l"axpa~e,.. should be able 10 undemand Ihd, lnte lax 

"lid h~ve confidence in Cllleul.lin!!.lhcir till< ilubilily. 

Ine",,,';nJl.lh" I"'nsporeney of Ihc lax law should: 

(II Result in" s~ ... m \hat is f.i".,.. ~"d i. ~ruiv.d by I""P"Y.'" as Il<:ing fnirt...-; 

(21 Enh~nce Ih. emdetley ofMlminlstering the \a~ S),Slem; 

(3) Inc..,as<: laxpayer and 13J<; praclilioocr ten,'nly In I~X planning ~nd tompli~ncc; 

~4) Relluce lax ",tum c.,.ror ",tcs; 

(51 Pffi ~ide a Silmulll~ for ~Q\\"lh by making economic deci4ion·mBkill~lnor~ cOld ,,"I; and 

(6) R~dll,e Ih~ di=1 and indi",e! ~O~IS of """'plyint! "iih and adminiSlerin.;"; a comp!~K ""d 

noolrnn~p"r~nl ta.' 'yo'"m, h..,ing up ",!!<>ureeS ror p'"Od~eli\'c !ll!tivili<!:i, 

GENeRAL I Et,'TS 

Ba$ed Oil our membc~' exporl~nce. worl;inll with omall bu~lnesses. Ihere lire a numl:>er of B""'O in 

,he n~w Inlc'11l.1 Revenue Code (Cod~) secllon 45R _ Emf1loy~ health Insurance eKpon..,. of sm.1I 

cmploycrlI - ,,'here olir simplicily ami IrllnSparcncy prinCiple,; a~ ni~ follo,,'oo, The~ a.., •• wUlliInl 

your attention in oro"r to provide 3n effecli"e in,,""tive for small employers 10 pro"id~ health 

,,,,,,rallce cov~ragc 10 tII.ir t:mpioyet"S. We underslsod the challenges Con!:re .. f3Ces 3S it lacltle. 

th. o<lmpl~ K ;$Sucs Inher~"1 In d",m~g ta~ legislation ~nd appreeialll YOll' diligence. in l')Iing II) do 

Ihe riGhl thing for IUKpaYl""', 
53 


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AICPA', Wriuen Test;mony fl)1" 'he Record 

Suoc<lmmll(L'" ()f1 O' ~r5i8.h1 

CQf1lmilll'" on Ways and t.k'llns 

Ilcarin~ on Sm~1I Busin.ss lieald, lru;urnnce Tn Credil 

Po~e1 of7 

We understand a wei., o~j""t;"" h ... been idenlifi~ - the n .... -jj \0 r~d""e Ih~ numbor of unin~ured 

individuals. Onc~ this WllS ;d",uili~d. d,. simpl~st and mo .. Ilansp:trelll approaches 10 

Impl"'n~nlluiM should hay. been !;Ou8.hI, Small bu~ines~s, or their prot'es"ional lId"!""rs, arc 

iocreHsing.ly "!"mdin!> m~ lime prepar;ng 13~'''''at~d formJ and s.:hedulcs ""ull;O!> in si!!flifi':anl 

in./'Case'S ill cost for eompl)ing wid, d,~ laWs. Complc~ or multislep calc ulalions should nOI bI' 

required, Tax ... '<.'()nlk .... pin~ ,h()uld do.ely emulale normal bu,iness practices. '1'1>" lanSUl!g~ us..'<1 

in definitions. cxplaoalions, lind ell8ibilit~ re<juiremcnls should be.- undc'1'S~1M1abl~ by Ihe la~.ll!rOUP 

of lII~payer5, Uncenaimies and an inability to Imderslllnd Ihe UiX I~ws should be avoided 10 ",duce 

anxi~ly and fruSlralion by uxpaycrJ, 

T he . moll bu.in ~ heallh insurllnee IU~ credil ""$ n(ll viewed by 1Il<>.1 . moll emplf}~erlI ~. ~n 

ine~nli~e 10 provide health insunlncc c,,~cral!c to ~ir ~mploytcs a~1 year, In order for ~n inccntiw 

10 "., eff""ti~c, taxp"ye", ",,,,t k"ow of its existe"e~. know whelllCr ;1 "ppli .." to lhem and hi,,,, il 

.rp"~ !O IIt~m. Since m!>'il , moll empiOY<"N did nOI ~now UIIlillhe end ofth~ year lor aflertlte yur 

ended whenlh~ir \n~ome la~ relurn' ".re prepared) "helher Or nOllhey qualifi ed to. I~ cn.'dit. lbere 

was no ine~ntiv. (or them 10 pruvidc health jll,urnnc~ <",,'erage , $j!lee many "r the yari.bl •• !.ueh 

as, Ihe n~mlxr of f~lI·time "'IuiV31enl employees .nd !.h. ho"" wort.<"d p<r employe_) art: difficult 10 

eSlimate .arly in th~ yur, i! "'"5 poinllf<S for emplu)'ers or their UtX prae,iti<>".'" !u iJ<,llin lesting 

eligibility Or pnlemi311), cak",.ling Ih. c",dil, Only;n ";l u~ti"n. " 'hcN 11Ie employcr cmpl,,) ...! k_ 

Ihan I~' rull-time ffllplOyff. did it make sen$<' 10 """Iuat,·, ".,r"", the end of the YL'IIr, Ihe ~efil of 

j)<'rl:hasing h""lth insu".nc. ~nd t:t~ ng advanlage of the credit Til<: reason f,,.. Ihis is explained in 

mo", deUlil below, 

ISSIJES ENCOUNTERED 

The n~ ",,' RN .nu~ S~r>k" (" lRS~) "'ould be compl;m~nt.d on providing guido.nc" 011 the 

applicalion of !h~ cr~dit and .1..., on i"form;~g tax.pay~'" a"d laX profef;siol\llis 0" th~ a,'ailabili,y of 

thc cr~..!i , Ho"c'-cr, c,en II ilh Ihis gu idance. mony lax pruf"".ionals and Iu,_pa)'er. ff}und.hI: <Tcdil 

10 I>: quite compl"", rhe compl~xily (If Ihe eredil resullS fron! IhI: vlIrious components of Ih~ credit 

as follow", 

tkftnilion. used 10 dc(cm!ine eli!j:ihillt)' fOf the tOldi!. The clef'ni(ion of eligiblt smatt 

~lIlpl<>}'~r. full-lime lquival",,! employ.~s. """raJ>!' annuol wBges, and empJoy~ 8 .. not 

str:lijj:hlforwaru or eo"siSlen! wilh uther p""isio". urtheCoo~. 

Ikfinition (If .Ii~ib e SllIali ~n'r'oyer. An eligible small ~tnpl"ye'" w"-'! based nn 'he number 

of IYI'·tilll"- equi,'slen\ employees (FTE..). lh~ .'"mg" :mllo.1 "-ag"g and the he,lth in."mllec 

Irrall!>ement In place, This delini!ion was eonfus;n!!. and hard 10 apply, It;s also I"«lnsistenl 

",ith Ihe def,ni!;on of small business USL'<I in variou~ olhfr Code !Ie"'lions. Examples uf Ihe 

deroniliun "f.wall hosin~ .. indud~ Ihe futtnwing: 

o Re.;~h c",dit for cO<!Ir.lCt research "x",,"><!S und~r Code sen;on 41 deline$ a Slllbtl 

b"sin~ss lIS My pe=n if the Mnual a"~rag. nUlIlber of "mployees employed by thaI 

I'<'rwn durin!! cltheroflhe (WO prcc<'<llng cal~lld.:lry~a" was Soo or fewer. 

o ATth~r ~dk!ll Savings AccOUII1 under Cooe !l<'C\;on 220 d~Ii"<'$ lhe I~nn >IS any 

empl<>yer if such cmpl<>),cr employed an ,,'cl'IIge of 50 Of' feo;.."r employecs on 

bu~incs~ day, during eilher of the IWo preceding calendar )'e"", The pmvi.ion 
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CPA'~ Wriutn T~,'i,"OII)' for tho Re<:ortl 

SU~"",,"itL"" "In V~01\igln 

C<')mmillCf' (){J Way, lind M~an s 

Hearing on Small a,..in<:>il;lIcalLh Insurance Ta~ Credil 

I'alle 4 of7 

continues 10 all<,)w c~lla n J;f\)winll emplQYom; ,<,) 'l"~in ,~a'me!l1 a~ small ~mr o)'c"T 

even o~~b Ihc a"cr~l!e n~",tx:r ofempluye.", cxcct'd. SO, 

o Cl'C'dil for !"'n.ion plan SUIrtUP COSIS und .. Code section 45£ us..'S IIw sam~ d.finilion 

in Cod~ ""elion 408(p~1~i) which is any .mplo}'er ,hal had no more ,h." 100 

cmplll)~! who .... cei"cd II Icast S5.000 of compensaliO<1 rmm tho "'rnplo)'er fUr IIL~ 

preeedinl! year. Sc'C\ion 408t.p)(2~i) rdales 10 ~mploy~rs eli~ible 10 usc Savings 

Inecllli\'c M"'ch Plall ror Employ ..... (S I~l'L E) "'Ii",mc", accuunt •. 

o The Consolidal...t Olnnibu. Budr,<'I Re<."i>/lcili.lion ACI of 1985 (COBRA) 

l'Olll IlU~,ion n'q uirrmelll$ ~Iso provide • smllil employer c>tCepoion. A .m. 1I 

empl<ly .... i. Me thol ool"l'lln(1)' cmpll»'<'(! fewer than 10 omplayNS durina Ih< 

I""ce<iin~ year. 

Phase <,)Ul oflhe c",dil txt..,d on number oftmployt~ and aver':lg~ annual w .. ges. 1'he .",dil 

is phaJled out on"" Ih~ rUIl·lime "'lyil'alem "'pl"y~e """m e.cee<is len and \1", ",'er.I';' 

~nnual "'_.\10:5 ~K<.." s S15.000. Th~ =d;1 ~ <ompl,,~ly dimirnl1~d wh~n Ih. ~mplayer h35 

eilher 25 rull"'n'e equivalent .mpl"y.~ .,.. ir h~ ~Wr':l!l<' .Mual w"!Iu "ecds S50.000. 

The full cr~dit i~ .lIowed iflhe clj&ibl~ ,","" C"'plll).r hus len or fe"'" full·lim. emplo)'<cs 

and Ih. aWnlge annll~ 1 wages do nOl eXl'<!Cd 525,000. l}".se ~ase-oIlIS made Ih. credil 

difficult 10 apply Bnd required numerous calculations ~ro", delCn,,;ni"g the all10unl or Ih. 

erodil availablt. 

Catculali".; Ihc Ill"nbcr of .mplo)·c.". A dClelnlin:nion lirl>l Ims 10 be m~de oS to which 

cmploy~C1; ...... counll."<!. Self"'mplo)'~ busin= owne.., more lha" 2% sharcholders. 5% 

own,'I"S and Iht'Sl' individuals' r"",ily mc"'b<>r$ ar.: "'" ~o""i<lr1'C'd e",ploy<'<:$. Po'1o(;"'. 

emplo)'C<'S and I~ased employe." arC elisible. IIc.:au.e Ihe eli/libi!ity rules are bil.\(....t In pan 

u" Ih. lIumbor of FTI:s. 1101 Ihe numbor ur .lIll'lo)"~r>C , cmplu~'c!'S Ihal u"" pan·ti",. wUlkers 

mRy '1l1alil)' eWII irthey employ n"ore Ih"" 25 in<lividu"ls. 

C~ .ulatin tho emploYl.., hOllrs of service is ,,,,c'<ll."<! to dNcrmine the number of FTE<. Ollcn 

the numb..'f of anno~1 rs w(lr(..etl b~ ~mploJ <'e is 001 t~~dily ~"~il bl~ especially f<lr a 

fISCal year la~p")'er, A delaill."<! analysi~ or each employi'<!'s I\ot.Irs i5 n"Necllo arrive ;u lh~ 

aCLU,,1 helll" required to meel ,his requireme!!!. HOUlS in exce •• of 1.0MO 3re not included. 

~or employers. Ihal expericnc~ high tumov .... Or hir.: se<lSOl1JI "'lIrkers. Ihi~ ~lIi"'m"nt is 

p!U'licularly trnubl~wmc. IRS is-wed Noti<;~ 20 1().4~. ru CI"<)dit for Employ"" Health 

I"sumnco F.,xpcnse5 "rSmal! En'plo)'ers. which provides ~uid~'1Ce on I\"w 10 delCO";"" Ih" 

number of homs of se,,·ice. rhe NOlie~ provide. Ihree melhod. to delomlinc IILo total 

number of hou", of ..,rvic~ a. folluws: 

" Delermin. aClual houts of ... rvioc rrom I"<'<'Ortis ofhou/"j wor1<ed and houts for whleh 

payme", i. made or due (paymem ~ ","de or due f~r voca,'o". holi!lay. illness. 

iO<'ll~i ~ .• ".1; 

o Usc a d:ly>·,..or1<...t cqui":llency wl\cn,by Ihe l"mp layee is =di!cd witM eighl hoors of 

se,, ic~ ror each day for which Ihe employee would ~ ""I"ircd 10 be cll...Ji'ed wilh "I 

least One hour or ..,,,,ke for se,,'ic~5 1"'""",,«1 and fill" c~nain period, "h." nO 

services arc perronncd .uei, "" ,'scalion: or 

Q Use 8 weeb .. workcd equivalency whcn'b)' the employe. is en:ditcd with 40 hour~ of 

service fo< .-:Ich w~k fo< Which Ihe cmploy~ would be requi",d 10 be cred,(ed with 

al leaSI one hour of ",,,,icc for ..,rvic~. perfollncd and ror certain I",riods "'hen no 

"''' ic~> arr perfonned ~uch 8$ vacation. 
55 


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AICPA'~ Wrinen Test;mony for Ih. Record 

Sul>rommiUc~ 00 Ovc~igJlI 

Commiuee on Ways alld M~ans 

Hearing on Small Bu.ine,s -IcaU~ In sumnc" Tn C,edil 

P.);~Sof7 

Delcmlin;"g "hid, qualified h.ca lth plan orre,l."d bl' 1m: .mlll bu~incSll i .• eligible for !he 

crt'<lir, F.~ch ~I.aliftcd h.callh plan n""ds ,,, be ~valualed scpaflllc l), In determine if!h,' "Iigihle 

smal l employ~r makes nOn-ell:Clive Nntribmions on behalf of each employe", of a uniform 

pcrcen"'g", hul 001 below 50%, or the premium coSI of Ihe qualified health plan, Qualified 

health jnsurnnc~ plaM InclUde h<"lllt h Insurance. dental or "i.ion, IWlg leml <"lire, Medicare 

SUf')l iemcnI,1 health insurance am""g ulhcl1l_ It is l"'!!Iible that some health pl.ns Bn' digihk 

"'hi Ie uther plall ' ,,'" nnl. 

Oclcmlining whether or nollhe 50"1, cowrng" is <lOci. For 2010, a. long a. Ihe "mplo)'", p.id 

at leasl SO''' "r inglc o:o-.'CTagC. Ihe T'f:qulremcOl ",as met ",CfI If lhe empl"y", nelually 

pro\'i~d mol\' c.~f>"nsi\'e cO"crage, such ~ (~m;ly co"crnge, arnJ conlribulcd less lhan 50% 

of the ",ore. c.xl'I'nsi\"l! co,'emse. 

Delemlining Ihe p",miums gibl~ for the cl\'dil. n,e cli~,ble premium i~!he . m"lIer of !he 

a~l"al prtmium PlOid by !he empJ,,)'cr or Ih~ ."ernge p...,mium for the s",~11 ro~p murltel in 

whiCh the emplo)·er oITers h"."llh in,;ul1lllc ~ "o"erng<'. 'rhe IRS providB the aV""'I!e 

premium for lhe ,mall group martel ba..,d on "ngle .IId f.nlily cOI'ern!:e. £"'ployet'!l 

clllldl"'ti~S busit)<'"Ss in multiple >lates .,.., n.'qui",d, for cuh "mploy"". to dctennin~ the 

pl\'ruium by Iat~ and by Iypeof c"verJlle. 

heat;ng mUhiple employtfS as a 5ingle employer f". purposes of this credit Many $mull 

busine .. employe ... m"y nol have I" ho> t"'.led"" 8 .ingle empl"yu for any other purpo'''' of 

the Code rc.ultinll in a "ne-!ime caJcnlulion fur purpo..,. orthis credit. 

For mallY "m"1I enlployet1i, IIlX compliance .:os" .... ere c",alc"il without an olY""tting ""ncfil. II. 

""ted by on .. "rmy colle~guc., "many tim<"1 there was a lot or ,",,011: for nol 3 lot of tl'lum. ~ h WaS 

MI uncommon rhis yeor for laX p"'pare'5 tO hBve Sp<'nl up 10 20% oflhe r;me n""us.a!), 10 prep.re.n 

enli.e mnll bu~ines~ ",tum jusl "n lbe "",dil ta lcul. ,ioll, .mly to leum Ihat the d ien! did not qualiry 

for Ihe Cl\'dit. A! such. many small employers felt I!I~ enti", prooze"" "'U a fruitless efron or ..... U I..:I 

~~p<'nsc. 

Rt:COMMEN DATIQNS 

The "ICPA ~~om""ends m~kin& tgX ~implifjc~lion nnd Il1In'parency In I\'gard to the sma ll btl,i""u 

he~ltll insur:m.c ta ~ credil ~ prk',ity. Complexity is ollen overlooked in d"'~llin~ l~ gi5 lation i)«.usc 

nepl;,'. impac," on Ihe ,"'" '~!iI~m .r~ ot1~ n le5ll obvious to lawmake ... trying 10 soh'e '·Ioday's·· 

problem$ IUld o;mJ~ bt-<'l>Ine apparent In Ih~ long nm. Many ~ prufes~l lln"l ~ bel e~e Ihall~gi$ a"oo 

~ 1lI'<!<kd to s~ Ih~ cO linu,"il ~i"bil\ty of th~ small b,,-,in~<s h~~lth ;n<ul1IlI<'e ta., credit. W~ 

belie,·. B .impler o~i'ion is pos~ ibl e and n...:e_!)' to ollow Ihe. credil to be u.~c"<l a. on incentive jor 

smalt empl<ryc O'l; 10 pu",hasc h~allh iMurall"e "r continue provlJillg n.,3lth ;'l!;u.:llwe 10 its 

efTIpluyCl"_ Sttking" <;rnpl~r approach 10 delerm;ne eligibililY for 11", credit would minim;,,,, Ihe 

1",.11 business la xpayen;' cumpliance bYnlM. MOhY m(l)1 bu~ineS>e$ find la~ compli. ,, ~e 

ch~lIenging us Ihey lack Ihe rcsourc"" to (omp!), willl U,e rules,. Also. a t""!"Iyer would moN: likdy 

be able 10 dClennine Ihe impBCl of purch .. ing h •• llh insur~tI"" for ito employe"". Ba""d Ull the 

<'urNIII kgislalio", loe,~ i! 1>Q ~asy way If! qukkly ~v.lunl' "'helh~r or nOI a small busin~~s "",,ul<l be. 

eliJ!ible for Ihi$ crcdiL Q"ali fi ~atioD i5 "'\Sed on I"TEI and average COII\p<'!lS:tI;01I, A m~1I busi!>eS!l 

d"". nol h. , . th~s. ilem. ",adily n~.i\ahle, An ","cumulatlon "f information .rnJ ~oO\ple~ 

ealclJlalionS w""" required thi. l~ar to dClermine if. credil ",ould be avallablr. Mony lim., Ihe 
56 


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AICPA's Wriu~n T~Slimon)' f<)r 111" Record 

Subl'Ilmmi[(c'" 00 Oversighl 

C<)mmiu"" 00 Ways and Means 

Hearing "" Small Bu,inc.s l'leahh Insu",,,c,, Tu en,dil 

.~c6 on 

50Illill bu.ineu. t>l m"'il on~" Il1dr advi!;Or. g.nher.:d all oflhe requi~ info"nilion, IIIn Ihrough the 

calcublioni and dc'''rmin~d Ih~y wcrr: nol eli~ibl., or We", unl)' p.nilllly ~Ii~iblc, for 1M ",~di, 

I>l-<:~u~ MI~ a,'crag" ~nrw"1 wag,.,. [llIid "I Iheir emplo)cc"S Or Ihe "mploy~'(! (OUll l. 

Tht- AICPA ",cumm~nlh thaI ),o u co" .• id~r ch.nllillJ; the d~f",itio" ofa ~moJl business 10 .ilMr b .. ~ 

!he ddinilion IlI\ Bro~s r~ipl$ 0' ernpi,),ct ~oul\l fronl Ih~ prior year Of Ihc jJwrnge oflhe prior '''n 

yesTS. or i"tretl.e Ihe f"lIlimc e<jui>'3ll'1l1 ploy~ t""nl "limber. Sl"'cial co)nsid~rmion should olso 

be given 10 "",ali Uempl O'Kanizalion. when dolining J!1O" receipts si nce ""me of their J!.fOOS 

",ceip~ indurk' "unearned i"""",e,~ .""h as charitable conlribuliOfl! I'I.'CCi\'N. 

A small business' llmss receipls ",,,lid be i>a..::d on Ihe prior year', Br"s~ .... 'C1!ipls or Ihe avcllI>'c of 

1M prior Ihree yeil"$ g.ros. re.:e;pu, ~,;j"g the defin;lil)n on prior year gross receipl. '" wlISe. would 

increase sinlplicily a"d '''''''span:"cy sin", cn'ploycrn wou ld nO! n""d lIIgathcr any informal ion on i,. 

numbolr of cum", yc~r full-time ~"uiv~ en\ employees or il~ av=g.c Qnnual "ages. Using prior yur 

infom,mion wo~ld toe readny available ~lIo ing Ihe la~p"ycr to be able 10 calculal~ earl)' in the year 

Ih~ lax s"vin~ by purcha<inll health i".u"'nc~ f'" its employees. The <.",ployer w""ld "'01'1.'ly ""e 

Ihe I'tmounl already ",p.,,,cd on ils la ~ return 10 Ihe IKS, 

W'" al80 ,uW" Ihol Ihe ph"sc-<IUI "skul",i"n. ror Ihe emptoy"" co,,", and ,he .,,,,,,,,1 salary be 

eliminOlN, Pha~-Qu~ "",.Ie ditlkllilie. in e5linlJling • laxp"y r"~ benef" from Ihe <"Co~o)1l1ic 

choic~ of purchasing. or "o",inlJ;n ~ 10 provide hl'llllh inSlIl'[tnce 10 ;IS employees- The inlemcli,'e 

prov;.iUM of employc~ e(lunl and nnu~1 salol)' ,,"ould QI.'IO be eliminalc'\!. 

Ahemal;"dy, if chonging the ddiniliOll "f small business i, not an oplio", c"""ide, raising Ihe 

",crage "nn"allola,y ,,"d Ihe cmpillyce c,,...nl n"mber. 

l'he AICPA 300 r«onH"cnds Ihal you addre", Ihe IW<>-Far requiremcl" "",,,ing in 2014. Ib ving 

!he provi$ion annly 10 a !a~pa)er fur onll a ,"o-)car pcrioJ ,;t.ar\ing w11h Ih~ first lea, h~ 1O .'ray~r 

provides COVt"faIOC!(1 ilS employeO$ ~dd$ confusion and obwum; Ih~ I~w 's e/TC<;I. I" "ddilion, Ihe 

requir~menl would add an o.dmini"l'lIli,·c burden 10 Ihe IRS as il ",wId have \0 monilor wh~ hcr or 

nM lhe laxpayer is lal.:inl' Ih. ~redil for m= year.; lluln Ih-ry ar. eliHible. If Ihe provision will 

~onlinu~ '" lJ.<' limil~d io IWO y~a,." afler 2013, consid<-r giving Iho IRS ~m alh t.,.,..,"" au lhorily '" he 

.bk to uuloOialicall)' ~luIn~. a Ia'p"yer's relurn if il is delermined lhal Ihe credil ,.~s '"~"" bl'yon<l 

the ,,, 0 yea,.", 

One p<1I~IlI;a i ronlCquenc~ /lr ",eking Ihc simpl.sl ~pPfoach may be reduced preciliOll, Under 

cum.',,' 1&"" si",ple s_""'ral rule. Ore ottcn followed by dennil;on, of "~ifi< lem,' used, as well as 

"cepli,~, . lu the ~"neral rule and limil81ions, This is d~""...t ne<egsary 10 anticipale all p"ssible 

5CenariOS .nd oI~e polont",1 loopholes, Unf1)!'1 una'el). Ihis le"el of delPli lends \0 inlrtXlooc 

si~nificanl complexily. Allhough simpler and le.ss p,""ciso: appro;,chcs m"y mise or lowe, laXes for an 

"ninlende<l few, k ... dCl3il "",o,,ld .;mplify Ihc tax law and '-N'''''' "dm;ni.lral;"~ and coml'li"""e 

burden~ for ",ony m.1I businesso:s. 
57 

f 


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AICPA'Ii Wrinon Te. ,imony for ,I,e R""ord 

Su~omml11c'" on O"crslgn[ 

Cummill':" on Ways and M,'aM 

II<"' rin ~ on Sm~III3~,incss Heallh In '''TlIne.: Tax Credil 

I'. ~~ 7 or'7 

CLOSI:W; REMARKS 

~ apllr<'cialc ~O Uf fM ~ ,1\ cNnmining some of Ihc d;m "hle5 that mall h\l" n~ ~cs ~nd small13x 

"N~mpl orpnil alian;; rae;, in ""," igaling Ibroull.h Ihe ru ll'S on lhe JI emplo)'CTS' health insurnm;c 

las "",dil. The complexilY oflhe ercdil Mls Id, 13Xp.yt" pt'ff'1~x d "boUI how the IS): law "l'pliC'l 10 

Ihem. Many small h,, in" S~5 Spenl mo~ lime or COSI 011 Ih ~ pr<'pnt1llion "r Ih ~ income tU reW!'I1$ 

Ihis ye'~r in ord .. " 10 ,,,,kulale Iheir I"'lemial Ile~ lt h in,uranee credit onl)' 10 !c m Ih~) r~cciv.:d a 

mi"inl3llu benefil, iran)' al all. 

Wc CIICOl1l"3gc )00 10 revit·w om puhli"3lions ,\ICPA's ~x Policy C""<;<:(!I SlaICml.'I1\ # 1; Guidinll. 

l'rrn £il! l~ !l (j-"~Ln ~,Ii'$ 1'i\ ~ ~ 1' li ~ill J1l ..n~ns.l'li.~in! "r 

Tax Simn!jji~linL1 nd Ih\.' .... .:iJ::t. ~ I'oli,::! Co"","yl Slalement "3; Ou,din!>, I'rinc ipic'S fur 11ui 

L! w TrsLL"ea,.e~y 10 a",i 1 }OU in t"SI,"Z any "ew pruposal' .ga'"'' the I"inciple. ur go"d lax 

policy. 

ThC' AICl' A is tht< n~li ~1 ro ~S:i n~\ or, anil.lllion "r cI·rtifi<'<l public ;><: OUL1I~n' s "Dnlplis<'d uf 

appro~i",uldy 371,000 "'~'I1lbe rs. Oor ",~~nD<'" III" ... ,., clients on fed.,,,,I, stale and inlemalio",.lla .• 

mauer •• and pr-e par-e income 8nd other tax returnS for millioos Dr Amcrie; n5 . Our members provide 

..,,,·ices '0 indi idu~l .. ,,,,,.excmpl o'l:aniz31ion •. s,nsll ""d m~d um· ized bw;inc&sf"S. as well as 

Amcrie ' i @c~1 bu.incs .... -..-. 

Thank YOll. "gsin, for lh~ opponunilY 10 leslit'y. I "ould be happy 10 ."swer any qU<:Slions )' UII may 

havc. 
58 

Chairman BOUSTANY. Thank you, Ms. Thompson. 

Mr. McCracken, you may proceed. 

STATEMENT OF TODD MCCRACKEN, PRESIDENT, 

NATIONAL SMALL BUSINESS ASSOCIATION, WASHINGTON, DC 

Mr. MCCRACKEN. Thank you, Mr. Chairman. Chairman 

Boustany and Ranking Member Lewis, we appreciate the opportunity to be here today to speak to the Subcommittee, and we appreciate your commitment to finding ways to find workable solutions to get affordable health coverage in the hands of small companies. Again, my name is Todd McCracken, I am the president of 

the National Small Business Association. And we are a national 

small business advocacy organization that has worked on these 

issues for many, many years. 

Our sources indicate that there is still a very high level of confusion about the health care law among the small business community that extends, I think, to this tax credit. Part of the confusion, 

I believe, stems from the start date of the law, 2014. I think there 

are still some companies that don’t believe that some of these credits really begin until that timeframe. 

That said, I think the IRS actually has done a pretty good job 

of outreach to the small business community. I think that they 

have engaged a lot of small business organizations in creating 

awareness of the tax credit. We certainly try to get information to 

our members, so that if there is a credit that they are able to claim, 

they are making sure they are doing it. 

But I think there is still a huge vacuum there, because it—the 

overall complexity of the Tax Code plays a significant role, I think, 

in this as well, because there are so many aspects, so many credits, 

so many things we are trying to induce or incent companies to do 

or not do, that to a large extent it becomes sort of a white noise 

for them, and it becomes very difficult to get their attention on a 

particular provision to affect the way they do business. 

And as my colleagues from the AICPA have pointed out I think 

very capably in their written statement, the calculation is relatively complex, especially for small companies that don’t have a 

stable work force. They have employees that come in and out of 

service that work differing hourly schedules on a week-to-week 

basis, those that have seasonal and part-time employees. It can be 

relatively complex for them to calculate. And that is a lot of companies. It is more standard for many small businesses to have that 

kind of work force than to have a very stable, it’s pretty much the 

same all year kind of work force. For those companies it would be 

relatively simple. 

But I think the single biggest issue that this credit faces is that 

it is a credit chasing an audience that is just very, very small. If 

you look at the provision of health insurance in the smallest companies, most—by quite a lot—companies do not offer health insurance to their employees. If you look at the number of those very 

small companies—ones who would be most eligible to receive the 

full 35 percent tax credit that are fewer than 10, have low-wage 

workers, less than $25,000 a year, a very high percentage of those 

companies employ family members in the business. And those famVerDate Mar 15 2010 08:09 Jan 23, 2013 Jkt 076181 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\76181\76181.XXX 76181

dkrause on DSKHT7XVN1PROD with HEARING
59 

ily members are specifically precluded from taking this tax credit 

if they are an employee in the business. 

So, you may have a situation where a small business offers 

health insurance, and most of the low-wage employees who are eligible decline the coverage, because they simply cannot afford to pay 

their half of the premium, which is clearly understandable in that 

labor market. And so there is really nothing left for that company, 

even though they technically offer health insurance, there is nothing left for them to take a tax credit against, because they don’t 

have that expense. 

And when you look at the raw numbers that have been—that the 

IRS and Treasury have provided, granted, they are preliminary 

and they need a thorough analysis when they are all in. But if you 

look at the numbers, there is about 300,000 companies that have 

claimed the credit for about $400 million, a little above that in both 

cases. That works out to an average of about $1,300 per business. 

And $1,300 is $1,300. But in the larger scheme of how much health 

insurance costs, that is not even 25 percent of one employee’s single coverage value. 

So that leads me to believe it seems very likely that there is a 

whole bunch of companies who are taking it at the margins, who 

have more than 10 employees, have average wages more than 

$25,000 a year, and have—did the whole calculation, and figured 

out they could get a very small sliver of the tax credit. But it winds 

up being a very small percentage of their overall health insurance 

costs, which could be 80, $100,000 a year. So I suspect that may 

be what is happening here. 

But all this being said, we have always believed that the best 

way to subsidize health insurance is to look at individuals, look at 

their own personal situation, and not to do it through businesses. 

And to bring down the overall cost of health insurance is the fundamental issue I think this congress needs to grapple with. 

Thank you for having me today. 

[The prepared statement of Mr. McCracken follows:] 


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dkrause on DSKHT7XVN1PROD with HEARING76181A.029

Tcstimony of Todd McCrackt'n 

President 

On bdHllf ofth ... Na titllllil Small Busilll.'SS Associlliion 

Uouse Commille ... nn Ways lind Muns Sub ... ommiU«, on O'· ... n ighl 

Uuring: 

"TIle Implementation 311d EITl-.:/;\'cnl"SS of/he Small Bllsinc:;sHealth I[lsuta[lcc Ta;.. Credil,'· 

i"'ovembcr 15, 2(1/1 

1156 15,h S/rt'Ct. N, W '. SlI it ~ 1100 

Washinghln. DC 10005 

102·293·8830 
61 


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, 

Chaimmn l3oustany, Ranking Member l.ewis and members [lfthc COmmitlL"e, on lit-half 

urlhe I SO,OUO small-busines$ Q""Crs represented by Ihe Nmiorml Small Business 

Associulion (NSIJA). I would like \u thank you for Ihe opportunity III appear tod;IY to 

discuss the implcrlll."ntatiQIl and effectiveness uflhe Small Business Health In$urlIllcc Ta;\: 

Credit cf'ClIled by the P:llienl Protection and AOord:lble Care Act (F'PACA). 

NSBA is the n~lion s oiliesl silmil-business advocacy group representing employers in 

~vcry s\a\('. As a strictly nun-partisan organi:Wlion. we reach cntplOYl'rs in~!I .'iCl'!ors and 

indllslrics urlhe U.S. ecollomy from rctaillo trade to technolu~Y--Olir members are as 

divCTSC as Ihe economy Ihm they fucl. NSBA 's policy positions and priorities UIC strictly 

fonnulillcd through robust voluntC<.'r Ic:.den;hip, communicated by NSB/\ st~l1; and 

rcflcl:live of ollr nation's 29.6 million slll~1I busim:sscs. Indeed. h~';)lIh care reform I13S 

dOlllinDl~d the mClllbcr-dril'cn Icgisl9til'e priority agenda at NSRA for year.), und NSBA 

has been an oulsro~en 1~ ;lder on tile lorie, 

In facL according 10 NSBA 's Mid-Year Economic Rcpon, released laic-July, the cost of 

he'Jlth care l'tlluinues til be an issue with 44 pen:l>Jll of small-business owners who 

provide heallh ;nSlll'llnce experiencing a premium in~~ase of II pcrccnt or mort:. To 

addl\.'S' these ct)Sts, s'MII busincss.:s hal'e implemenled til.:' toilol,jog ch ~ogC$ : 50 

percem iocreascd the deductible. 50 pcrcCI1I hcld ofT on cmploYL"I.'" compensmion 

increases. 46 percclH ;nerl'.ascd the. employee share tlfthe premium. 41 pcrcent reduced 

emplo)ec benefits, 28 percent switched insurance c3rriers. 32 pen:enl held olT on hiring a 

new ("l11ployee, and 24 percem held ofT on impicmenting new growth ;;trtltcgies. 

Thcse COSI~ nrc coming \() a bn:a~ing point where employer.; have fellcr and IcwL'r 

txonelit design options and are inert'asiogly forced 10 Il1n~c difficult ~ll1ploym~1ll 

decisions as 3 result.lllere also W~S;UI increasc in those who n:poned lh~} were forced 

to la), orran ~mployce due to health l'are l'ostS. 

NSOA has invested in th~ health care refonn debate fbr dccl1des. NSOA '5 volunteer 

!cal.krship, wilh guidanl>c from sevel"JI experts, published S",oll BI/ ~il1('$ ... lf(' .. tll!J Cm'/! 

Rrform--A Long-Term SO/Illion / or All ill 2004. This propos:)1 sought to achieve 

unil'ersnl eO\'cragc, foo::u~ on individual responsibility IUld cmpoII emlCn\, creme ihe ri,ghi 

Illarkct·based inn'ntil'l's. ~nd a relentless Ibells nn improving quality while driving out 

Ullilecessar), wastetiil, and harmful c~rc. 

While rPACA ~llelllptcd to l1ddn:ss 11l~oy of these gO;lls, it f .. iled to snt1icieotly 111:hicve 

Ihc mOSt impomull factor tOT small businesses in health care reform; thm is, 10 bring 

down Ihe COSI ofhcallh core ami lower insUr.lnce premiums ior all individuals. Thus, 

despite the eXII".lordinary needs UfSlllllll businesses tor a sl1stainuble health ~"are system, 

NSBA opposlxl PI'AC,\. 1I01\cver, the flaws of PI'ACA dll not obviate lhe ongoing 

small-business need rur health core refonn and COSt CuOloi!1mcol. 

MQrc spedfic3l1y, II'e are here today 10 di,,'uss the elTcctivem:ss ofa provisi()I1 in 

I'I'ACA that incit,des a I\.-c.:ntly implemented limited-time lax credit to encournge small 

businesses to prol'ide health earc covel"Jge to emplo)'ces. 'fhc Smltll Busincss Il calth 
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Insura,llce Ta.\ Credit (Small Ruslncss Ta.~ Cl\'diO is u,'aiJablc to eCr1ain smf\1I buslo",s$cs 

and covers some orlhe CO~l of employee h~flllh insum!lce. 

Wbat A~ the Tu Credits? 

The lax credits arc available 1<) small businl'SSl'S in \W,) phases. To be ,-ligible for oolh 

pha.<>o oflhe tax credits, cn,ploycrs must h,lVC 25 or less full-l(me cquj,'abll employees 

with u"croge wugcs of$50.ooo 11f kss and provide ul kas! 50 perc.:nlofthc totnl 

premium COSIS. In thl" first phase ofthe Ill." credit- lax years 20 I 0·201 J- cmploycrs 

mccting the criteria can recei\'!,' a tax cr...-dir \\'onh up to 3S percent ofthc employer's 

cunlribulion toward the Cl1lp]IlYt-C'S health insumucc. 

ihe second phase hegins in 2014 when h~ Exchnnge is creal~d. hc credits are available 

for 1 .... 0 years OI1~C the cmplo)'cr purchases a group policy tllrougl1 the Exchange 

(important to nOle: phase 11 credits a~ a\'ailable strictly lhrougl1lhc ~chang~). 

Employe{':; ml't:tin!! Ihe criteria can recci,,~ a ta ~ credit worth up 10 50 perCl"llt nfthe 

employer's contribution Ul\\'ard thc emplnyce's health insnmnec during thi~ time. The 

tuilla ~ eTl:dit for both pha.~cs is available only Ulempluycrs with 10 ur less employees 

who hale average salaries of$25,000 or less. The credit phases (lut rur businesses 

between 10-25 fu ll-lime equil'3lcnt emplo)·ees wilh avcrage wuges belween S25.000--

$50.00{). Tax exempt cmploycl"& meeting the aforementioned criteria gct a 15 percent 

credit for lax years 2010·2013 and 8 35 percenl credil for lhe 1"0 )'C31"& in Ihe Exchange, 

For-profit employers can capture thc ~x credits by deducting it ngninsl their fedcrJI 

ineomc ta.~ liJbility. The en.-dil ~ not refundablc, but it call be camed b3ek UIIC y,'ar and 

forward 20 )'can. Tax-c~cmpt emplo)crs can deduct It against their payroll taxes. 

The scll:empluyed are not eligible because the cn."tJil is unly available tu th\r.Sc businC$scs 

with cmployces. The only henhh insurancc premium self-employed individll3ls will 

qualify iQr are i( 'd~ral prcmium subsidies. assuming they mel'l the luw-illeo1l1e criteria 

Ihrougl1 1he Exchange. This inequity shuuld be remedied by ~llowing sole pruprictors lu 

be eligible for the tUX benefits anordctl to other small businesses. 

NSBA Oata 

Since the passage orlbe health care rcfonD law small-business UWflCI"& have expressed 

significant confusion about how the nell' hea lth care law will impllct their business. 

Today. huwcwr, there ,IPpeUrs tu bt' ~ slight incrC'.tsc 'Ilthe;r underst31lding of Ihe new 

law. 

Accordill!: 10 the NSI3A Mid-Year Report. nincteen p~rcent ofSJnall busillcsscs-up 

from 15 percent in December 201 O- said they hal'e 3 clear understanding of how the nell 

law I\jIJ impactlheir businl'Ss. Ml':lI\\\hile, 63 percent, up from 53 pcrcCrlI, s~id the), ~ve 

a limi ~d understanding and 11:\ (X'tcenl. 1101"11 from 32 percent, said they do not 

underst:md Dlall how their business will be imp:lcted. 
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CnITJ llln ity IIfTax Credit 

MO~1 bu,in.:!;'; lire n01 sure if they quulii)' primarily b...'CIIUSC il is foirly cUlllplc ~ lilld the 

lax credit ~ppcars 10 be all adminislrHlivc quagmin: for 5111311 businc>;s owners. According 

10 the pa£L'S and pages ofqucstions onswen:d on Ihe Imernal Revenue Service (IKS) 

website on lbe ~TCdil which CS$cnlialty proves the complexity of it- business owners 

lin"" 10 cakul3lc their 3\'emgc Iinnual wugc, figure oUllhe premiums Ihey paid for 

digiblecmployccs, flilure oUllhc a\'crngc premium for the small group market in "hieh 

Itwy om:red health ill sur~nce coventg.:, deal with vorious phase-olllS and limitations Ihal 

S13rt at I 0 emp oyc~'$ olr more and iigurc Oullocir full-lime toquivalCnl employees (FTEs) 

in oTtler 10 determine eligibility l!..!!!!. then s<:vcn wor~shc",l'; mu~1 hI:c compil'led in 

associalion with claiming Ihe credit, 

Compl)'ing wilh IRS ruks and regLLlmiQn~ is n01 a new burden fllr small busines5CS_ They 

tend 10 bo: an easy arg~t since unlike bil!' eorporalionS-lI'hich ha~ c hordes of 

act:ountants. benefits coordin3101"j, allorneys, pcn;Ol1ncl adminiSlrJIOr1l. ele. 31 their 

disI'OSIII-5n1ull busin=s onen ~rt D1 u los> 10 ke~p up wilh. impkment. nlTord. or eV~11 

understand the overwhelming regulalOry and P3fK'T"'ork demands oflhe federal 

government 

Approximately]6 percenl ofNSBA membtrs ha,·c fewer than 5 cmployccs- lCw, ifun~ . 

of "hum is a tax specialist- Jellving business owners with I\() Olher eh\lin' bullO hir" 

oUlsidc help to k('Cp Irack of a ll thdr additional r~porting and liling rcquin::menl$, \~hkh 

t1\c~n s even mort' papcm'Qrk, 

According to the rt:l'cmly released Treasury Inspe>:tor Gcncml fnr Til." Administnuion 

(TIGTA) report lilled Affcmluh/c Cart' Ael; EjJorrs IU /mp/cmell/ rhe SmIlfIBII';;rrt'J'$ 

H.'fI/tI, CiJre TfU CI1!Jir Were '\/OSII,V SlIc'·"" ,ljid. bill Some IIII(lfowmel/l.r I1rl' ,Veed<:d 

Il.\:flay~..-s ha~e been slow!o claim Ihe e,,:<lil. and bolh laxpaycl1i an..J la.\ practilioners ~re 

t1\,lking mislakes nit Fornt 8941 in spile of the extensive outrrnch und educalion e!Torts 

made b)' Ihe IRS 10 Infoml la~payers unll the ta~ preparer communily nboullhc credit and 

IIOW to ~l:Iim it Clearly ,<omplianee is c,'Ipcllsivc aod Ill.'lcl1nining rligibillly and phmning 

is pro"i!)!; IQ ~ cXlrcmcly difficult, 

Low Vohlmc of Pllrlicil," lion 

Despite IRS etrims to iofonn four rnillion emplo)'crs who would be eligible for the 

credit, th~ TIGTA rqJ<)rt Silltes the "olume Of claimS for Ihe erelli! bav« been low_ A~ ()r 

mid-May 2011 . only 228.000 taxpayers t,>llk advantage oflh~ crcll;1 for U IOtal am<ll.lnl of 

more than $278 million. 

Ccnainly. it sc.:ms likely thatlhc number of small lirnls ulili zin!, the crcll;1 is likdy tu 

risc somewhat as outreach eITons eOn1in ~ and 35 awnreness continues 10 build. 

Ilowe"o:r. il is also nol paniculariy \lTflri si n~ 10 NSIJA that panicipa1ioIJ b~ small 

employers is much lower Ihan had been 8n1iciPhled. 

/Is des igned, Ihe IllX credit is most ,'alua blc 10 \ cry mall , "cry Inw-wa{l,e eOl11paniC$. 

IIO"' .. ~cr. vcry few ofthcse companies an: abk to oITer heahh bendits al all. for myriad 

reasons. When those compani es ar" able to offer cm'cragc. thcir low-wage employees 
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Iypically decline ii, since they are unable 10 afford their own har(' tlflhc premium. In 

such a case, there is no employer-paid premium against which \0 claim the 13:': credit, 

even tor a small. low-wage cOl11plmy identiiicd as "oITering" hcahh insurance to its 

employees. A number of factors heighten this effect. 

High I\ lorbidity in Small G roups 

Whi!c I am oot an u(.'tual')" i\ is well-known in actuarial cin.\ks that morbidit), {a measure 

of poor health} is much higher in Ih~ very small group insunmcc market than in Ihe rest 

ufth e fTIiln.:Ct. Ofcourst'. it is 110\ generaU)' the case lhal workers in smull fimls are sicker 

than oiller workers. Ilowc\'cr. il is till' sicker employees who arc wiHing to make the 

fina ncial sacrinccs \0 obtain and retain covcmgc in the vcry small group markel. a facl 

which drives up averoge premiums in this sector. Those higher premiulils. in lum. reduce 

Ihe number of hcallhy low-wage workcrs willing io pay for he311h insumnce. dril·ing Ihe 

premiums yet higber. 

Fllmily i\lembers as Employce1I in 5011111 Groups 

In nwny small compnnies (again, especi:llly under len cmployees. where Ihe credit in 

queslion is 1110S1 vlL luoble) multiple famil y members may serve ItS employees of the 

company. 5molllow-\\,age companies Ihut cmploy fumily members arc the. ones most 

likely to offer employer-sponsored health insurance. since Ihm plan nlso provides 

eOI'crage for the owne rs own famil y. While there is not good ~vail:lbl e daU!, based 011 our 

experiencc, we strongly belielc that thtse husincsS('S account for a I'ery substantial 

portion uflhc smalleSt compani.:s Ihat still offt.'r hc~lth insurance to emplOyees. 

Ilowcver, Ihose family employecs ar.; indigible for Ihis ttL ... nedit and many of the Olher 

employees may hal'c declined till' coverage because of high eLlS!. 

The a~ Credit is Non·Refundable 

Bec:llJse the t31( credit is nonrefundable. somc cmployers will nut be able 10 take full 

advantagc of it even iflhey mcct aillhe criteria. If the smalt busincss has no laxable 

income in Ihe year in whicb it wishcs 10 rL~c.ivc the credit. il may carry Ihe credit forward 

for 20 year.; or baekward~ onc year (after 2010). Ta .... ·e:-;cmpt organ ~lio ~ may usc the 

credilto offsct wilhholding and Medicare ta ~l"S tha! they OWl" 011 heholf of thr:ir 

l"mployecs. 

COSI Contain,nelll 

I leallh care spending in the United Slales has increased lrom 12.5 percent ofODP in 

1990 t(l 13.8 perctnl in 2000 1(1 17.6 peretnt in 17.6 ptrcent in 2009. Nearly one in SI.", 

doltars spent in the U.S. arc spem on hL·alth care. This mah,s ou rc(lu try '~ health .;arl" 

system uniquely expensive. B) almost any 11ll'!rie (life C .... pcctaney al birth or age 65, 

infant mortality. et~.), our system docs not ddivl"f nwn.:rially beller f(.'SUItS than olhl"t 

:Idvanl"ed eUIUHrkos· health eare systems. 
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United Simes 16.0% 

C:ll1ndo 10.4% 

Ff'Jncc 11.2% 

Gl'ml31l1" 10.5% 

Italy 9.1 % 

NClllcrJands '.9% 

Swj(zcrlamJ 10.70/. 

United Kin dom 8.7% 

Rising health COSIS C01l5Ul11l" mOSl orme !'Cal wag," increases Ihm ordinary A11J~,.ican~ 

rtteive. l11e)' imp!)5e a huge expense on business and harm our inlemationul 

cOlllpclilivcocs.-;. nley will make our Slale and fcdcrall1uolgd dimcullics ncarly 

intr.K1nhlc. 

RCSlf'.Iining 'ishl.!/, health costs \1'ill: 

• DrJ!11mically improv" federal and 5tHlc budgl1ary $itua lio o~ 

Drml131ically improve Ihe cash oompC1l:i31ion ofwQri<:in!;!,Amcricans; and 

Substantially improve Ihe international cumpclitivcllC!l's of U.S. husinl";f><."S. 

The Congrcssinnal lludgcl Office (CBO) projl:l:tions belQW show this problem getting. 

slc;ldil)' "ors~. wilh 101><1 health car~ spending ,<,aching an absurd 25 percent afGO!' by 

1035. h is a problem Ihal simply must be addresSl'!l. And one lhing is ~cnain. Simply 

m~klng adjuSlments arouod lhc cdg~ oflh(.' CUm'nt sySl(.'m will nOt solve Ihe problem. 

'Statl$li<al Ab'U"a<"I{)fU ... UOj,~ S,a'l"ll.101 2. T.bl~ t14~. 
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• 

• 

• 

• 

• 

" • 

" .. 

Total Spt'o(\ing filr Health Care Under CBO's Estcndl'tl·Basthne Scenario 

(Percentage orGross Dome:>I;.;; Product) 

~ ... , ~ 

... • n •• 

Inlermedilll! Tm'I (:2ooo to 2035) 

..... . 

•• •• 

~I 

s.ource: COIIgres.>'oWlI Budgel om<e. LoII&-Tmn Oullook for Ilealih C"", Spell<iin&. 2009. 
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Tolallkalth iIJId N'onheal!h Spt!lIding Per Capit~ 

Under eBO's E.~tended-Basdint SccrlUrio 

(Thousands of2009 dollurs) 

"r--------------------------7C~~~----------_, AttIIII : Pttjtdel 

• 

" 

oL_~_L~ __ L_~_L~ __ L_~~~ __ L_L__L_" 

lHO 19&5 1970 It/S 19110 1985 Ifill 1m ZQ:XI ZQ05 2D1O ZIIS mil ms 1/)0 'illS 

S""",r, Con!lf"5Siollili Budge1 OIT"",. 2009 

rrincipttS of lIeallh Ca re Cosl Constraint 

The Current health care Olnn.:ctplncc is thoroughly broken lIod bears no resemblance \0 Ii 

normal marhl. There is \'inual1y no competition on the basis ofpric!!. lnfornmtion llboot 

quulity rcgnrding providers is very difficult 10 obtain. Neither providers nur consumers 

hav\' a mcaniugfu! ;ncl'lllivc tIl cconomi7.c and a third pany P'tys fQr the rkcisinns made 

by consumer.; and provider.; orhcalth services. In fact. almost all o r lhc incentives in the 

current system arc lo spcnd more money. 

Consumers, although [hey hilve some first dollnr c{lst-sharing. ha~e no inccruil'c ;It the 

margin to cconomize on h~alt h care COSts. Generall y. the marginal COSt 10 consumers 

under privme ;nsur,mce "nd under Medicare and McdiC:lid is zero. This nlust change. We 

must move the privau.' and govemmclll Iwalth systems toward positivc margillal costs 10 

conSllmcr:>. As h~ been almW;luniversaily understood by ~conom ~ts ~incc the 1870s, il 

is atth~ margin that decisions arc made. Irtherc is a marginal cost to the consumer of 

on.li:ring an udditiollal test or choosing.a more d~nsil(: trealmen!. then Consum~rs. will 

hal'e somc incentive \0 cconomi:tc. The CUIT~nt!lot deductive and 1131 c()-pay system 

means that therc is no marginnl costs 10 consumers for decting more cNpcnsi\'e hetllth 

care. 

Anolher rea:;on for high hospital costs arc mamlall"S on hospitals to treat those thai arril'e 

at Ihc emergenc:>, room for frec ifnCCCSSilry. 13)' this mechanism, a large number or 

unins\JI\.'<1 persons received free medical care. I>roviding Ihis care. howcver. is nOI free 

and the hospitals recover it in the end by higher bills to paying patientS. 
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Moreover, the employer-prOVision ofhcaJUt insurance (dr" len by the 1(L\ t)(ciusioll for 

t'll1ploycr pt(}vidcd l1e311h insuruncel funher brc~ks the link between hc~hh cal'\! 

cJ(pcndil11res by conSUnlcn; and the cost of providing those cxpcnditurcs. GcncrJliy, a 

conSillncr's hc~Jlh care ~OSIS consist 01' ;'1 deductible (which is so low il is almoSI always 

c..x,ccdcd) and minOf co-payments. Th~re is liule 10 I1U vurian~c in a ~Qnsumcr's hll:lllh 

care coSb dcptndin~ on Ih .. degree [0 which heallh c~re services 8rc ustd. 

1'l'Qvidcrs, 111canwhilc. have every incentive 10 provide more health care oc.:ausc by 

providing more Sl'n. ices they make morc money. They arc under no pressure to compelI' 

on the basis of price bl'Causc Ihe hcahh c:m: con~umer general ly faClOS a I.~ro margillal 

cost. Very little infommlion is ~\'ailablc or provided rcgardingqualily. Anil;ciallimils 

nrt' placed on tile number of newly minted doctors caell ycar. Mcdicare, Medicaid and 

privale insur<'rs arc under 1rt'lI1cndous pl"l.'SSUfC to simply pay the medical bills pJ1."Sl'l1t~·d 

to lhcm and are treated as pariahs by politicians and the meditl iflhtyanempt to push 

back on he~lth care provider COSl~. 

Th,,~ Is one "bvious cxeeption wthe forgoing analysis: thc Cas!' of elcctlve procedures 

such as corrective eye laser surg~ry or cosmetic surgery. In these medical jjclds, 

cUlllpctition on the hasi~ of price and quality is commollplncc. The reason, of cuurse. i~ 

thaltrn: consumer is footing the bill. 

Neither docs the current S)Stcm posS<..'S~ theCOSl cOnlainmenl fcaturt's of a govCntnlCnt 

rull ~ystem. The govemmcnt is not in a po~ition to dictute prices and s.11llries to health 

care providers. [LcaJmot usc monopoly powcr to dictate to supplkrs. 

In short, we have tile worst of both worlds. A private murket without any "rthe nonnal 

market mechanisms IhutiL-lld to ell;ciency, cost control allll quality gains, A guvcmmcnl 

insurnnce systcm thal has almost none of the COSt containment feDlu= that n singlepa)'cr, mOllopoly, socia!i;.:cd sy.~tern would have. Thus. 'I'e Il~~e Ihe mosl cspcnsiw 

health care system in the. world. We ~lmnO! ~ftord it. 

The health care syst~m IllUst be changed su tlial: 

• Consumers haw substanti31 marginal cOSts when cOllsuminghealth can: services; 

• COllsumers bendi! financially I,hen th.·y et.:ontHlIi;(c on ht'allh care services: 

HCll\th care providers compete oll!hc basis or price: 

• HL""llhh care providers compete on thc ba$is of'ltmlity aud outcomes; 

• Health care pro~iders h~ve a substanti al incentive to economilC; and 

Genuinely nnwamlnted medic;'!l m~lpraL1ice claims or ~ces~i\"C awards ore 

limited. 

Maintaining the presem system will lI<."eomplish IlOne ufthcse goals. Bmh r'rcsidellt 

Obwna's PPAC" A and Rep. Paul R)'an's Ml"<lieare retonn proposal move towards a 

premium support system (wher\: government sUDsidizt'S" Ihe purchase of private 

insur""dllee). They retain the basic structure of the CUITCnt hl:ahh care system with nu 
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meaningful consumer costs at the margin and linle incentive for consumers or providcn 

10 l"1!onomizl". [n Rep. RyJu's case, the plan may succt.'t:d in shiftingcost'l from 

government onto "ril'ate citizens. bul il can be ~pectcd to do linle to reduce ol'cmil 

hc~lth care custs, 

Ensuring thm consumers benr meaningful marginal COSt5 and that therefore providers in 

competing fur !hOSt: consumers hal'\: a rca;;()11 to cumpelc on the basis of price and qu~lj y 

can be accomplished "'Ihoul hannlng the p<JQr or io"cr middle dass. [nsti:ad, ho"'c,'cr, 

or ~ubsidiz in g insur.l.llce prcmium~. gowrnml'nt funds could tw: used l\) pnwidc 

indivi()uals with 3 Slircnd for health care C.XpCI\SCS 111'11 ifllm used for hea lth care 

c.~flCnSt:S because the COJlSumcr ctT"'I..1i\'e l"CUrlnmi7.i:d (;'.10 cwntllully be used by the 

consumer for ",halevcr they "'all!. I.n this way, there is 3 rca l incentive for everyOl1c 

in\'olvcd in the syst~111 10 economize. 

Tort retorm can 3150 contribute 10 ht:alth cart: cost conI3imnetl1. The CBO t:stimatt:s Ihal a 

mod~.o;1 medical malpracticc refoml In", woul(i SII"C o,'cr "SO billiol,lhrough til year.<;. 

Howen·r. Ihose savings wQUld L"{)nlinue to incrc:l.seas Ihc COSI or medical m3lpf"JClice 

litigalion in the U.S. continues to grow. steadily incrrnsing aI almost 12 percenl annunlly 

since 1975. MOR'Iwer, according to Ihc I larvard School of Public He-,dth. 40 percent of 

malpractice suits fik'll in Ihe U.S. lire "without merit:' In j,(eneral, slud ies placc the dir~t 

and indireci cOSts ofmalpracticc bctwecll 5 ~recnt and 10 p.'ft!Cnl orlOtal US medicnl 

, ,)sts. 

Bcyond lrtldiliollal medical Ina lpmClicc laws, NSBA supports sot11e kind of safe It:lrbor 

for physidplIs. as well as the us ... of health cmlrts. Any saft: harbor nile would havc 10 be 

in conjunction with fedcrnlly-ddin~'{j. evidcnec-b.:Js.'<I medical procedures .. Ph)'sieians. 

who abide by tho£c standards and report Qllleom~'S. would be allowed a certain Icvel of 

protccti qn from medical liability. Hl'alth eoons WQuid allow for the establishment of 

spedali:.:cd C()urt~ for de-Jling witn mcdic~1 malpf"Jcticeclaims. NSBi\ surveys show 83 

percent ofsrnalt busin~cs support monetary eaps in m('dical malpraetic(' cases. That 

suney also fOOlld Ihal;l mujority suppon ad<.lre~sing tile is>ue feder~lIy. Tun reform 

traditionally has bl-.:n dealt wjth at the stille level; owc~ er, tile Niltional Conre ('nC~ of 

State Legislatures cites 17 Sillies where there arc nQ stipulatiQns wllntsoc\'cr on medical 

malpmeticc lawsuit caps. The broad variance in $taICS' law$ encournges allomC}'S to 

forum shop, \\hich ~imply increR5 • .,; the nccd fQr a fcd~'TlI1 solutiQn. 

Conclusion 

This tax credit is onlytcmporory- it expires ;tner n\"e~'eSnl-(lnd gi\'cn the f3il ~ uf 

l'I'ACA \0 ~"()nlpin ~'Osts cvcnlllo5e fl'w sntalJ-businc..~ses able to ntilize Illis cn.'<Iil will be 

len wilhQllt any kind of support und a I'cry cxpensive bcnefitthat is tlifTteul! to take away 

once they ofler it 10 employees. r a,~ credits are ncitller the cure-all for smtdl bllsine~s' 

health insuf"mee IIQCS nor a replacement for good 1)OIicies on cost-conminmcnt Ih3t n13ke 

hcD.l lh cnre more aflordable. 

The nllmbe-r of uninsured in the Unill-d States is a big problem thm nel'lis 10 be: addressed, 

bllt Ihe ul1insuR'<I arc not a hQmogeneous group and the), arc uninsured for s~I ernJ 

dirr''1"Cnt rca!;OI1S. I t\Jwcv~r, ouu common clement Ihal runs through the 'l1tirc health care 
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SySt':111 , for those insUlcd Of not, is the e<'lSI t)fhe~llh care. 10 fae\. Ihe impetus for hcnhh 

C111l.' refoml was sold Oil Ihe need III address spiml ing COSI by altering the increasing 

tu:ahh care 1.'05\ trend. 

UnfOnUmlldl'. Ihis founding tenet ofrefonn has bcxn losllhrough deliberotions. The 

e BO has rcpon~ll thai PPACA does not 3her tlw unsusminablc l<lIlg-lcnn h~~hh innalion 

trends 10 tbe Ie"cl needed 10 m~J.:c g sigrJi licanl enough di rlcrencc in prcllliuHlS five. 10 or 

15 years down the rood. 

I would like 10 thank Chairnlan Bouslany for holding this hC<lring. and ~ppr(:cimc the 

oppotnmity In provide 3 sm;llI-busincss pcrsp.:clive 10 Ille Small Business IIClIhh 

lnsumnc,' TiU Credit. We hope to cllnlinul." 10 wQI1.: ,~ilh you und your SlafTas ~ 

evnSlruClivc par1icipant as the implcmcnlmiol1 Of lhis proposal cOntinues 10 be 311hc 

fi)retTon\. und will gJ~dl) provid~ additional infnmlBtion or insigllt into tIl(' health cari.· 

ChJllC11gCS facl"<l by our nmion'5 smJIl busincS!;ell, 
71 

Chairman BOUSTANY. Thank you. 

Mr. Hisel, you may proceed. 

STATEMENT OF MATTHEW HISEL, CO-DIRECTOR, 

HOME RESOURCE, MISSOULA, MONTANA 

Mr. HISEL. Chairman Boustany, Ranking Member Lewis, and 

Subcommittee Members, thank you for the invitation to testify 

today. I appreciate the opportunity to share my experiences as a 

small employer with the ACA health insurance tax credit. My 

name is Matthew Hisel. I co-direct Home Resource, a building materials reuse center in Missoula, Montana. 

We collect and sell reusable building materials to reduce waste 

and promote a more vibrant and sustainable local economy. We 

also partner with a range of work training programs and offer educational classes. Home Resource, Incorporated is a non-profit under 

section 501(c)(3) under a special category for resource conservation. 

When we founded Home Resource in 2003, my co-founder and I 

were the only people on payroll. Now we employ between 15 and 

20 people. 

At Home Resource we believe our employees work best when 

they are healthy. We also know our health care benefit is key to 

attracting and retaining great employees. We have offered health 

insurance to employees who work more than 30 hours a week since 

2004, and we pay 100 percent of the premiums. 

Skyrocketing costs have made this difficult to sustain. We face 

double-digit increases practically every year, sometimes as high as 

39 percent. We have had to shop around for a new plan almost 

every year, and we have had to increase our deductibles and reduce 

benefits. We now have a $5,200 deductible. It is the kind of insurance that works fine until something goes wrong, as I can attest 

to personally from an emergency hospital stay that left me with 

bills totaling around $4,000. I had just barely been able to achieve 

the American dream of homeownership a few years before, and 

these bills forced me to sell my home. 

In the past year the ACA has changed our situation significantly, 

and for the better. This is thanks to both the tax credit and also 

other parts of the law. In 2010 we paid close to $11,000 for our employees’ health insurance. The tax credit cut our costs by over 

$2,000. For a small business struggling to keep health coverage, 

that makes all the difference. We were actually considering dropping our insurance in June of 2011, but knowing we would get the 

tax credit for 2010 tipped the balance and helped us maintain coverage. 

I found the credit pretty straightforward. I prepared the worksheet to determine if we qualified myself. It took me less than 10 

minutes. Our accountant spent a little over an hour preparing the 

final forms, at a cost of $195 to Home Resource. That is $195 to 

get more than $2,000 back. A small business like mine cannot ask 

for a better return on investment than that. 

While I was aware of the credit from following the debate over 

health care reform, and my accountant was aware when I asked 

her about it, I do believe there would be value in a broader education effort to ensure that all small business owners and their accountants are aware of the opportunity to claim it. If utilization of 


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72 

the credit is lower than expected, I would encourage you to consider building on it to help more businesses benefit. This could be 

done by raising the thresholds for FTEs to 50 and wages to 

$75,000. Since the Congressional Budget Office scored the credit at 

38 billion, I believe Congress should make sure all of these resources are getting to small businesses to help us with our health 

care costs. 

The tax credit isn’t the only piece of the health law that is helping us. There is the requirement that insurers cover free preventative care. There is the end to denying coverage for kids with preexisting conditions. I lost one of my best employees before this provision went into effect, because our insurer wouldn’t cover his kid, 

who was a cancer survivor with Downs Syndrome. 

And finally, after years of steep increases between 19 and 39 percent a year, this year’s increase was only 9 percent. Combine this 

with the tax credit, and we will see our effective health insurance 

costs go down by double digits this year. 

There are other benefits we are looking forward to in the health 

care reform, as well: the state insurance exchange, which will give 

small businesses more transparency, better choices, and more bargaining power; stronger rate review to protect us from unreasonable rate hikes; the minimum medical loss ratio requirement, 

which will ensure a basic standard of value for premiums; and reduced cost shifting, as more people get health insurance and start 

paying into the system. 

Based on the improvements we are already seeing, I believe it is 

critical that we keep moving forward on implementing the health 

law. You have an opportunity to build on the tax credit to help 

more businesses benefit. This credit is a bridge to a reformed insurance marketplace in 2014. If not enough businesses are making it 

across the bridge, let’s build the bridge wider, not blow it up. 

Helping small businesses get affordable health coverage is one of 

the most important things you can do to help us succeed, grow, and 

create jobs. Thank you. 

[The prepared statement of Mr. Hisel follows:] 


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dkrause on DSKHT7XVN1PROD with HEARING76181A.040

Statement of Matthew Hisel 

Co-director of Home ReSource 

Missoula, Montana 

Subcommittee on Oversight of the 

House Committee on Ways & Me:tns 

Hcaring Qn Small Business He:tlth Insurance T!\x Credit 

November 15! 2011 
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Ch8inn~n OU5taH~, RaU,king Member Lewis. and "":mbers ofl.hc Sui:x:otlltlliUec on O~ers'ghl. 

Thank you for th~ ,nvitalion 10 .e;1'fy lod:ly :.OOI'11h;;.> heallh ;llsurJllee (ax cred,t ellBe(cd as pan 

oflh~ IIffordable Care IIcl. I appr«iale tile opponunil)' 10 har~ my CAperie,,", ... s,, i(h health Care 

~nd wi01 1hi ~ lax 1:",11,1 as K small employer. 

My nam~ is Mallhew Hisel, nnJ I an1 lh~ co-di .... "Clor of It"me RcSourc". n building.ln3tcrials 

rcusccenler in MissoUla. Monla1~1. We coileci Jnd scllJ\'·usabl~ buildin<; Inuter,als 10 redu<:e 

wnst~. build hcahhier connllun;(ies. and promote B more "ihmnl nnd ~u~lajnlhle local.".ollomy. 

We :.Iso panner wilh a r~n!lc of",oO; traininll.progrJ1nS and offcrcducat;onal classes. 

Home ReSource is incl)rpOrmcd ru; a non·profit under Scclion 5QI(c)(3) onlle Int<'mal R<'vcnue 

Code. under a special c~l<:.!;ory for organilllt,ons lhnt sUP!"'" ",souree conscr\'ation. Ncarl~ all of 

our in~"Qmc, aboU1 85 percent. comes from b<lsin;,ss oper:lIiorl!l - our building m31Uillls sto ..... a"d 

building dismantling seNi ...,. Tho"" operalil)ns arc sene ral ly sdt~susla ning and pro"idi! 

additional n!Wlllies 10 slippon t<J1I~~ljOnn! and durilllble octivitic-s. 

I co.fourld ~d Our business in 2003. Wh.:n 'w op"ncd our doon>. Ill> co.lounder snd I were the 

only people on payroll. Now. we empll»' between 15 ,md '20 people. 

Ilu lih Ca l"(' ' II O!,,~ Re5<Jul"l'c 

AI I'lome R.eSour(:e, we belie"e uur clllploy~ wurk beS( when they and their falu ilies arc 

huhhy. able (0 hL't"CSS nceded heahh CDr<:. and !\()1 worrying aboul ,"<,diel'! bDnkruptcy. eDling 

about Ihe health ufyour employees is ~ ,mall btlJim~ss '';tIll<.' We lake seriously. Fur that rc:rson. 

wc've Offered health InSurance 10 mrloyCd "ho ,,'ork mOre than 3() hour>; per week since "i! 

could firsl .3ffurd II) pay fur it in 2(H).l. ~nd we pay 100 pert"'nt of the premiums for covered 

cmplo~'<,es. 

Skyrocket,ng he,1Ith carc l'{lS\S have made thaI increasingly dimcuh, owc~er, Overllle last 

M'Ven )'L"1Irs. "'e've bren hit with double (Ii gil rale inc",a~ plllctienily cvery )car. s<)metinw, in 

excess 01'30 percen1. Wc've had tosllOp around for a IlCW plan ewry y<'~r bc;:,,,1St: we just 

, 
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couldn't absorb lbt uIIl'l'kming iO<:l'1:ascs. WC" 'e had to irten-aseour ,k<.luctiblcs alld othcrolli. 

of·pock~t costs ~nd reduce bell('tit~ in ord~r to ~(> nlillU1: ~\werag~. Wilen we','e Omugi1lthc i!;Sue 

10 our employ...:s and c~pb ined wc'd eilher n~'Cd 10 SlOp paying.lhc premiOIllS in full or incre'l5C 

lhe de<.lucliblc. lhey eho.\e 10 increase the dcduelibl~. 

II'S reached the poinl Ihallhc beSt plan wc oould nfTord for the currenl year ha~ u SS,200 

dcduniblc. It's Ihe kind of\nSo\'llIlCc.lhal ...,cms 10 workju~t fllle onlil S<)m~lhing gO<.'S wrong -

as J can allnl to pcrwnally flVm an cll1crgcnc)" bosp;lal stay h~ ~pring Ihm leti mc wilh bills 

lotaling ~roul1d $4.000. I h~djusl bardy oc.:l1 ~ble to a<:hiel'c lhe ~Am('rican Dl'1:alll~ of home 

o"ner.;hip a few years bdore. ~nd these bills fon;<."tlme to s,,.11 my homc. 

The ACA Sm.1I Emplu)u Tn CI·t-dil 

In the paSI )'car and a half. hCfllth care ,donn hasehMJ;cd "ur Sill'3liol1 signilic:llllly - lor the 

beller. This is lhanks in j'Illrito the lIew health ('lire ta.>: credil. and al:;., It) olher pro~ sions oftii<-

Affordablc Core AClthal af~ helping Wi lh cos,," and imprtwing our qlJ~lity (')I"co' ern!),e. 

Home ReSoW'C~ qu~l;fies for Ihe smaU cmrloyer health premium la:< credil. I'or 20 10. wh~n we 

paid $10.782 fur l\ealth inslJr.1oce. Ihi~ credit tUlsour (OSlS by Olore Ihan $2.000. Porll 5m~1I 

busiJlC.'Htroggling It) mainutin decent heahh <'tlverng\'. Ihm mak"'l aJilnc d;n~refK'e , W~ wen.' 

a<:1u.~lIy considering droppins our lIeRI!h insunmee Ihi5 year. butlh ... titS credit tipped Ih ... bIIlanc ... 

and IU'lpcd us nlJin13in ourcovernge. And "C anticipate =civing Ihe credil for Ihe l1e)(1 Sl:vcrnl 

ycan; liS a brid!lc to n reformed il1511rnliCC l11~rkctplacc in 2014. 

To ",,,,,,sliens abuul whe!h"" Ihe credil i. lOll complicated. I can My !rom c.'pcrit""" Ihal ( fOllnd 

it quilt Simightforward. ( prepared the worksh.,..1 mysclflO dNermine ifwc qualified and illoo\; 

m"less than 10 millule~. Alllhl" i"fonmlion I n<......Jed was already in oor Quickbooks soliware. 

Our accountams spcm a linle ov"," an hour preparins the final forms. al a COSt of$195 10 Heme 

ReSource. SO W~ paid 5 )95 to gel m,,", Iltan .$2,OOO back. ,\ small bosiness like minc can', m;k 

fOf1\ IxtIN I'I:tom Oil inVe;;tmcnlth"" 11t.01I. 
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While I W<I:; :,ware ofLb<' credil from following the de""le over ~eahh eare "'form, I do bc-~eve 

thert' would Ill' vn ~ in D hroader fflU(:~ti"ll cty<Jft to ell;;urt' tlmt nil smnll h\lsin~~s o"-ncrs. nnd 

their accounlants, art: aware of the opponun;t)' to cla;m ;(. 

AISQ. ifutilizatiQn orthis credit i~ lo\\er th~n anticipated, I would encuur~lte rOll to consider 

"ays to build On th~ crc:dit and help more busin(.'Sses benefit. This could be done Iiy rrlising the 

tup cnd of the employee thrcshold to SO FTEs and til<.- top end orthe "age scale to $75,000. This 

"ould ellsure thai mo«: busillcsses can benefit from Ihis Valu.l];)1c assislnncc while olher 

coo'jXment~ of the health law thnt will incrca>c ronlpctitioll und n.'tlucc casu ph.liie in o"cr time, 

Si""c the C()n~ssi')Ilal Budget Omee M'ored \his pie.-c ofthc 111!.llth low Ul SJll. billion. I would 

suggest the I't'Sponsible thio!,!. for Congr"Css 10 do ",ould be 10 build em Ih cretlit 10 make SUK nil 

of til<' allocated reSOurCCS are ll;el1inl:! to small businesses to help us with ourhcalth car..' costs. 

rather than spendi,,!!. time undenninilll; the credit or thre:l1ening 10 lake il away from lito$<: of u. 

lhal are benef,ting and IIsing il to maintain health c')Icrage lor our emplofc.!S. 

Olh~r In,",edi c H~,, Ii Ul of ,he AC" 10 m~1I Businesses 

The Iill< eredil ii nOlthc ooly provision "fthe AtT()fd~hle Care A~l h111'S hetping IIi, Theil:" an: n 

nwnber of OIher parts of the taw ,ha, we're S<"elng bcll~fits from nl...,..Kly. I \\ill hightigh' thre~ 

here. 

First. Ihere is the required COVCOlgC of prel'cotil'e cnre Wllh 110 eosi-sharing. Our insurn...:c 

covered preventiv" c~,.., bild: in 1()()4, but we had to drop illlK: v~1)' lIext year wlK:n the renewal 

"as going to cMt 391"'I'Cent m"'~. I'm gl3d we have preventive eove ... ge ,gain. Makin!! 

prevention a priori,),;. good for ounmp!oyces' health, \\"orl.:pl1>l:( productivity. and IOllg-tenn 

sal'inS" in the health care ')'5tCm. 

Secund. our el11plllYecs' kids witb prc-c.~isliIl8 conditions can no longer be dc"icd coventge. I 

losl 00\' of my be,t cmploy~cs he tore th;~ provision \\"cnt jlli<) clle.:t beeau,;to he had a child \I'1lf, 

had l'Jown S)ndromc and cunccr. and the insliTallcc COIIIP"UY refused to cover his child. Irtllc 

, 
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health rcfoon law had boxn;1l dTeCI Four ye~rs :lgll. " e would have been ~ble to proOJote !his 

... mplo)'ce 10 full-lime and pmvitic hcahh inslImncc for him and his child. 

And third, OU,rgre3K";1 "~rp i.~ "ame this "prin.g a\ ", n~wal\ime , Aller }C3<5 oroutr~l!eou. r3te 

il1c",a~e i - ""tween 19 ~nd 39 pcrt:ent. year allcr yem - Ihis y~a"s incrc sc ,vas only 9 percent. 

II's hartllO imagi ne Ihi. would be the ca.c without 1m, downward p,."ssure OIl mresand increased 

scrutiny ofmle incn:'(IS('S created by tne AITordablc CaK Act. Combining this wilh Ihe ta)( cn-dit. 

"h;ch CUI our effective healtlt care CO IS by more man 10 percent. w~'1'I: actually seeing our 

insumoct cost. gil oo\l'n by double dig;ts. 

LIIo.king Forward '0) UJl~o mi"g Oenefil!! of 'he ACA 

Looking forwu n:!' whcther )'ou gellllc \aX credil or not. 1 believe Ihcre '~ u lot for sm~lI hU$i~ss 

o"ners \0 look forl,an:! 10 as more clemenlS ofth" health law pha,., in. 

Ke)' el ements lhal will help $malll>usin~'SSl'S "jlh beuer COWl1l~" and lower cqsl$ Include: 

lal~ insunncf uchHngt'!i: In 2014. the opening ofrh~ ~\ale health insurnru:c exchanges will 

J;,ive small busini:sseS more transparency, bencrchoiccs. bma<kr risk poolin~ and more 

barg:lining power by allo"ing us to blind (ogclher 10 shop for cowr~I!'" This bargaining power 

and inc"'3l>"d compelition are crilicallU hringi", costs under con(rol. 

Strnllg" r . .. Ie re,';""" The law gives Slale. "",w IO<)I. and rcsoure 'S 10 S1rcnglhen ....,vi~w of 

insumocc TOIte increas~! pnd proteci small businC"iS(:s from unjU;;lificd mle hikcs. Gil'Cn the high 

lewl of markct l'OIK:CI1trdlion in the l1ca llh insuran,'" industry (especiall)' ill rural states like 

MOntlM) and ils negal;"e ,,!Teels on romP<'lilion, w'c n~'Cd Ihis slron""r rule revie" (0 pn.)ICe( uS 

from unl'C'~sOf1able and unjuslified r:ne increases. 

Millimu." m~di ll .~s nllio: The n,;nimum medicall()!;s ml;o n:quiremem "ill ~~I~Urc tllal 

s"l 11 busilW5Sl'S are geUing ~0Qd vall,." for Qur P"'tniUlll dollars. B;> n:quiring ills"TOI"ce 

C0111flo1nie;; 10 spend al1cu.~1 ~O ['Crecnl ofprcmiUlllsrolll'ctctl from ~mall grtlu!land ind vidu~1 

; 
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CUSlOlnCtS Qn actual lteallh ~'OSIS or pay 8 rebal~ 'fthey fail to tnc...,t!hc rCCjui.rcmcm. we ",UI 

illCrellse' the value Oril\l;umnc~ or decrease il' cost - or both, 

Red ud nJ: cIIst-shiftillg: As these pro"isi",,~ help more small businesses get health In;;un"'c~ 

and pay imo!he ~ystcm, businesses lhal are re~d)' providing co\ er~lte shQuld \It..., the "hidden 

la" "e [l'dY nowtO cO-'Cr c<hI-~hitlinJ:: from unCQmpc1I'\'1k..:! ca", decre"se, lowerin):; our cOSts 

overall. 

(;olld u .• ion 

lJasW QIO Ihc dl:lllcll~~ rv~ npcricnccd wilh h,'allh insurnnce liver tile la$1 scvernl years tl)'i~ 

III maintain ~ d~elll smull IJ,rtHIP plan for my cmplo),ffs, and based on Ihe impmvcmclII> ",~'re 

already seeing thanks to the Affurdable Care ACI, I believe (I is ,'rillea! lhat we kcep moving 

forward On health ,demn with mcasures like stm,1t' rate review. Ihe ,-jluc for premiums 

re(juirement, and the st.1te ,nsur-Ince ~)(~hangcs, 

I ulsu iel ~ w<' have an oppOrt"nily 10 build on ll>e- heA 's all business tax cre<iil lo help 

m"", sll\311 business<'S \)t,~tit Thi~ credil seNe>, 3lI a bridge 1" help us an"rd C"VCl"'dl;C as we 

lO"ye 1()",ard h~ e:<thnngcs nnd a rcrorm~d mao,ctpll\<.,,\: for h,-alth inlUl\l.n~, Ifnot enough 

businc~>c~ a", making il aCfQSS the bridge be<:UliSe ii's too;o nafTOW. let's !;mild !he bridge wid~r. 

not blo\\' il up, 

Spi"'lin!'. health ell'" ~nd iIlSUr.lrlCC e06IS arc: one of lhe- ,n3jor forces driving illCome dispmit)' 10 

runher and fun her e:<m:mcs in ree,'lIt dcc.adc~, [c~perirrn;<'tllhis force dill.'\:il)' "hcn [ had tu 

choose between paying m,-dical bills and paying 9 barely--un'nrdable mortgage, I bclicw In frcc 

ent('rpri5<', entrepreneur.\hip und ha rd work, BUllhe n.~ lOan..t only works "hen th;:,,,, i~ 

adequatc eompelition. when consume", have en"ugh cimices and innuencc OWr price., and 

"h<-n c.:onomic grtlwth occurs across Ihe in.come speClnlm, ootjust in the tOp I"'lCcmiles. 

The current health c~rc ~yslem nno\\'!; hig insumnec compo!ni!!.. 10 h,we monopoly <.-onlrol (\\'N 

prices, al\d Ih~ resl or us haw no chuice bUllO fon. over our hard·camed dollars 10 cover 

es ... ·ul;al heallh cnrc, Rcformingour h<!alth CUN sY5tcm i. one hnponam slep to\\~ rd improl'ing 

, 
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the I/veraU ~OOOlllY. becau5C mon: ~ar<.i.earnoN <.iI/liars will ",ma;n mU'e h~nd~ or"orking 

Amcncnl15 ,,1m will cin:;:ulnl~ Ihem. nOI hoard then!. 

Helpinj!: small business owners ""d Our employees gel <.ieee"t health cm'cmgc We can aIT,)rd is 

one oflhc mo~l ;mpollant thing!! "C can do to posilion ~maJi bu~inesses to .ucc<'e<i, grow. and 

cr<o:'l le jobs. Fbr the health nfAmcncru,s and bur l"COllOmy. il is impi:rDti.'c Ihat .... ·c keep movi,,!! 

forward. not backwlIrd. un health Jre reform. 

Thllnk y<>u. 
80 

Chairman BOUSTANY. Thank you, Mr. Hisel. We have heard a 

lot about the complexity of this tax credit this morning, both with 

the first panel and, Ms. Thompson and Mr. McCracken, your testimony both sort of corroborate that. And you know, we have heard 

about Form 8941 and the instructions, 8 pages, complex calculations that need to be done. 

What kind of feedback have small businesses been giving you on 

the value of this credit? 

Ms. THOMPSON. For my clients that are able to take advantage 

of the credit, they find that it is very helpful, because it does reduce the health insurance costs. And so the complexities that we 

are going through, to them it is worth it. 

Chairman BOUSTANY. Okay. Mr. McCracken. 

Mr. MCCRACKEN. I would say it is a mixed bag. I mean there 

certainly are companies that, as we just heard from the last example, that fit the definitions nicely, and can take a rather large 

share of the credit. My point is that there are very few of those 

companies in the larger scheme of the American economy. And so, 

you just have to factor that factor in. 

So I do think there are some companies who have gone through 

the exercise—and I have heard from some of these folks—who went 

through the exercise of doing the calculation, having their outside 

CPA firm do a lot of work for them to figure out what the credit 

would be, and at the end of the day claiming the credit, yes, because they had done the work, but it being a relatively small credit. And there was a frustration that they had gone through all the 

trouble. And if they had known the outcome, they probably 

wouldn’t have paid the CPA and done all the hassle to figure out 

the credit, because they only got a few hundred dollars or a thousand or two, which, in the scheme of a company that might have 

15, 20, 25 employees, would be a relatively small percentage of the 

credit. 

So, it is—it really depends very much on the specifics of the individual business. They really run the gamut between those two. 

Chairman BOUSTANY. Mr. McCracken, do you have any information on the actual cost to a small business to get this credit? 

Mr. MCCRACKEN. I don’t. And again, that is going to also vary 

greatly, depending upon the type of workforce that company has, 

because it is going to be much more difficult for a small company 

to have a highly seasonal, highly—lots of variations in its work 

force over the course of the year, sort of week by week and month 

by month. 

I should also point out that the smaller those companies are— 

which are the ones that stand to get the biggest credit, potentially—are the ones that have least automation in those processes, 

or the ones who are least likely—most of them don’t use a payroll 

service, just for example, in the below 10 market. 

So, for them to then go back and collect that data often is a timeconsuming manual process than to go back and figure out how 

many hours did each person work each week to figure out what the 

FTEs—so—but if you are a company that has a stable, 5-person 

work force and they all work 35 hours a week every week and that 

doesn’t change, it would be relatively simple. So—— 


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Chairman BOUSTANY. Ms. Thompson, do you have information 

on cost, maybe average cost for a small business? 

Ms. THOMPSON. We don’t really have the information on the 

cost of preparing the credit, because it depends on the size of the 

firm that is preparing the credit. It could be a small CPA firm, it 

could be a large, or it could be mid-sized. So you can’t really generalize on what the cost is going to be to prepare the credit calculations. 

Chairman BOUSTANY. Ballpark? 

Ms. THOMPSON. You can’t really ballpark it. 

Chairman BOUSTANY. Not even a ballpark figure? 

Ms. THOMPSON. Uh-uh. 

Chairman BOUSTANY. Okay. Well, the IRS has mentioned their 

outreach efforts. And Inspector General George gave them a B on 

it, not a bad mark. So it sounds as if they have really made significant efforts to move forward, to get the information out to tax preparers and—as well as to small businesses about the—their awareness of this credit. Yet, with all of this, participation still seems to 

be below what was predicted, and seems to be low, by most standards, even at this early stage. 

Ms. Thompson, is that because of insufficient outreach, insufficient information being put out to small business? Or is it because 

the credit is just complex, and small businesses have not availed 

themselves of that because of the complexity and cost? 

Ms. THOMPSON. I think at this point it is really too early to 

make a conclusion as to the effectiveness of the credit. Because, as 

we had heard, the information is not in for all of the tax returns 

that were on extension, which was as late as October 15th. And for 

those that were located in disaster areas, it could have even been 

October 31st. And as someone had mentioned, the tax-exempt organizations are due today. So, without having a full year of information, it is really too early to answer that question. 

Chairman BOUSTANY. Okay. Fair enough. Mr. McCracken. 

Mr. MCCRACKEN. I think a big issue, as I said before, is that 

there is a relatively small population of these firms who can maximize the credit. Most companies that offer health insurance that 

are below 10 employees are not low-wage firms. So they are limited 

on that end. 

So, when you drill down to how many companies are truly lowwage firms, have fewer than 10 employees, have been able to offer 

health insurance nevertheless, and have an uptake rate for their 

employees for the offer, you are just looking at a very small slice 

of the small business community. And I think a lot of the low uptake comes down from that fundamental point. 

And a lot of the companies that do offer health insurance in that 

market that might have been assumed to be taking the credit, 

when you dig deeper you find out that they are often employing 

family members who are specifically precluded from using the credit. 

Chairman BOUSTANY. And Ms. Thompson and Mr. McCracken, 

both of you mentioned that small businesses are often disproportionately hurt by the complexity of the Tax Code, because they are 

unable to hire or they don’t have the resources to hire the number 


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of tax preparers and accountants, lawyers, and so forth, advisors 

to navigate through the Code. 

And I am concerned about these different definitions of a small 

business that are out there. I think it was your testimony that 

highlighted some of that, your written testimony. For example, the 

research credit defines ‘‘small business’’ as one with 500 or fewer 

employees. But for the purposes of an Archer Medical savings account, it could be a business with fewer than 51 employees. And 

then there are all these various definitions. 

So, comment on how the Tax Code’s complexity affects these 

small employers, however they are defined, and hone in on the impact of this particular tax credit and its complexity, and the impact 

it is having. 

Ms. THOMPSON. Well, the AICPA is definitely in favor of simplifying the Tax Code. There is no such thing as a simple code, because the world is just very complex. So you really need to make 

it simpler than it is. And as you pointed out, something as basic 

as the definition of a small business, depending on which particular 

provision you are looking at, you are going to get a different answer. 

But we also understand that there may be reasons why they are 

different, depending on what you are trying to accomplish as your 

goal in passing legislation. 

So we can understand why it is different. We would like to see 

it a little bit more consistent, and for example, on this one, when 

we are talking about having to use current information, on all 

those other provisions that I had identified they were all using 

prior years, which is very helpful to that small business, because 

that is information that is going to be readily available to them, 

and it may not be as much of a stretch for them to go on the prior 

year, rather than the current year. 

So, it is more challenging for a small business. But I would have 

to say that the small businesses do need a professional to prepare 

their tax returns. And we do find that if they do hire the professional, they are going to be done correctly, and they may find that 

they are going to be saving more in taxes than they would otherwise, because they are going to be aware of these incentives. 

And the tax professional is doing these calculations all the time. 

So if it was a one-off, where one person was just preparing it, yes, 

it is going to sound very complicated. But if a CPA firm is doing 

it, they are doing it multiple times for multiple employers, and it 

is going to become a lot less complex for them. 

Chairman BOUSTANY. Mr. McCracken, briefly, would you like 

to respond? 

Mr. MCCRACKEN. Yes. Your basic question was about the definition of small companies. And there aren’t very many other instances for the tax law—usually there is other ways of defining 

smaller entities, rather than necessarily employee size. 

But I also would warn against creating sort of a cliff effect by, 

for all purposes, defining small business exactly the same way. Because if you sort of define it at 25 employees, or wherever you pick 

that number, whether it is for good things below that or bad things 

above that, you are going to create a significant disincentive. So 


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there does need to be some variation, to some degree, so that you 

don’t wind up with one place where people don’t want to cross. 

Chairman BOUSTANY. Thank you. Ranking Member Lewis. 

Mr. LEWIS. Thank you very much, Mr. Chairman. I want to 

thank each of you for being here this morning. 

I would like for each one of you to respond to this question by 

saying yes or no. Do you support repeal of the small business 

health care tax credit in the Affordable Care Act? 

Ms. THOMPSON. I know you said that was supposed to be a yes 

or no answer. 

Mr. LEWIS. Yes? 

Ms. THOMPSON. Except the AICPA doesn’t have a position either for or against, so I can’t really answer that question. 

Mr. LEWIS. Yes, would you want to speak for yourself as individual? You don’t want to get in trouble? 

Ms. THOMPSON. I am not going to get in trouble today. 

[Laughter.] 

Mr. LEWIS. Oh, just take a chance. 

Ms. THOMPSON. No, I think I am going to pass. 

[Laughter.] 

Mr. LEWIS. Oh, you will pass? 

Ms. THOMPSON. Yes, sorry. 

Mr. LEWIS. That is all right. 

Mr. MCCRACKEN. I would say no. 

Mr. HISEL. No. 

Mr. LEWIS. Thank you. Mr. Hisel, what role did the health care 

credit play in your decision to provide health insurance for your 

employees? Did it play any role? 

Mr. HISEL. We were already providing health insurance. But as 

I said, we were considering dropping it at the beginning of this 

year, 2011. I spent a lot of time trying to balance my budget for 

a year, looking a year in advance. And you know, this year we were 

really struggling with a challenging economy through the winter, 

and I was working very hard to get the number at the end of the 

day to remain positive. 

And it ultimately made a big difference to us, because I really 

was looking at health insurance this year. And ultimately, knowing 

that we would get the credit for 2010, and then again in 2011, that 

tipped the balance. It was a deciding factor, and we decided to keep 

our health insurance. 

Mr. LEWIS. So you would be a strong supporter of the health 

care tax credit? 

Mr. HISEL. Absolutely. 

Mr. LEWIS. So you are saying as for my house, for your house, 

could you say to other small businesspeople, ‘‘You should take a 

look at it?’’ 

Mr. HISEL. Absolutely. And I know a lot of people have. And I 

do agree that it should be expanded to include more small businesses. Those thresholds should be increased and perhaps brought 

in line with other definitions, 50 FTEs and wages. 

I would also like to say that we are a very seasonal business. We 

fluctuate with the construction season quite a bit. And I completed 

this qualifying worksheet myself. It is six simple fill-in-the-blanks. 

I had all the information in QuickBooks. It was not that chalVerDate Mar 15 2010 08:09 Jan 23, 2013 Jkt 076181 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\76181\76181.XXX 76181

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lenging. I don’t quite understand what the problem was. And then, 

you know, to just hand it over to our accounting service, they did 

not seem to have a huge problem with it. 

And I think it just needs to be expanded. 

Mr. LEWIS. Well, you traveled a great distance to be here today. 

Mr. HISEL. Yes. 

Mr. LEWIS. Further than anyone. 

Mr. HISEL. I am sorry? 

Mr. LEWIS. I said you traveled a great distance to come and testify today. And I just want to thank you for coming. 

Mr. HISEL. You are welcome, thank you for having me. 

Mr. LEWIS. Thank you. Mr. Chairman. 

Chairman BOUSTANY. I thank the gentleman. Ms. Black. 

Ms. BLACK. Thank you, Mr. Chairman. Again, thank you, panelists, for being here today. It is very helpful. 

It has been suggested that what we see here was just a political 

stunt. And yet I continue to hear that there is complexity. And the 

complexity includes things like definitions that are confusing, that 

it is also confusing with the other parts of the tax code. And yet, 

there—has been suggested that it could be done in three simple 

steps. 

I would like to hear—and Mr. Hisel, I probably want to come 

back to you, but I would like to hear, first of all, from Ms. Thompson and Mr. McCracken about what they are hearing and what 

their experience are with dealing with the small businesses. If it 

is just three simple steps, then why is it that there are folks that 

are saying that it is more complex than that? So help me understand that. 

Ms. THOMPSON. I think that the provision does require a lot 

of questions to be answered. And the first one is starting off with 

whether or not they do qualify as a small business. And it is not 

as easy as just looking to the prior year’s gross receipts, or the 

prior year’s employee count. It is really based on the current year 

information. 

And when you look at the definition of ‘‘employee,’’ as one of the 

other panels had mentioned, it is not just your employee count on 

the W–2s that were issued during the year, it needs a little bit 

more analysis to look at those employees, to see whether or not 

there is any family members that have to be excluded. If you have 

seasonal workers, how many—whether those seasonal workers can 

be included or not. And so, there is a lot of definitions or analysis 

that goes into whether or not that person is an employee that is 

going to be eligible for that credit. 

And then, if you talk about the hours, the hours are going to be 

based on the payroll records, again. But you do have to look at it, 

because if somebody went over 2,080 hours, you don’t include the 

excess over that level, so you would include only that amount. If 

the people aren’t being compensated on an hourly basis, then they 

may have other methods of determining what—the hours works. 

So, it is those type of definitions and analysis each step of the 

way that adds to the amount of work that is being done for that 

credit. And so that is why we were suggesting that if you change 

the definition away from the way it is right now, and base it on 


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something like the prior year, it does away with a lot of the complexity that is there. 

Ms. BLACK. Mr. McCracken. 

Mr. MCCRACKEN. Actually, I don’t have a lot to add to that. 

But I would also point out that, you know, for a lot of these companies, they will see that and realize they need to go through lots of 

steps, and they have to change their procedures to simplify how 

they can gather that data in order to claim the credit. And if the 

credit they are able to claim they think will be at a relatively low 

level, and it is temporary, they might not want to go through that 

trouble of change the way they do it. 

Again, that is more likely for the companies that have more than 

10 or 15 employees, that are sort of reaching the upper size of the 

availability of the credit. But my sense is those are the companies 

that are far more likely to be offering health insurance to the employees. So it is going to affect a greater variety of actual—of people. 

Ms. BLACK. So I think what I hear you saying is that it is all 

across the board. And maybe Mr. Hisel has a little bit more stability there, where he is not having to figure quite as many of these 

different categories that I am seeing to not be well defined, or that 

there is a lot of variations in the employees, the number of employees, the hours worked, and that kind of thing. 

Obviously, we all want to get to the same point, where we can 

let small businesses take advantage of something that is there to 

incentivize them to provide insurance for their employees. So I appreciate your recommendations there. 

The next question I wanted to ask is the piece on the family 

members. Is there a reason why you believe that—and I wasn’t 

here when this was passed, so I don’t know—why family members 

would be excluded? Because it seems that that is very typical in 

small businesses, that small businesses are very family-oriented. 

And to exclude family members doesn’t seem like it is really going 

to be beneficial. Is there a reason, Ms. Thompson or Mr. 

McCracken, that you could enlighten me on that piece? 

Ms. THOMPSON. I really didn’t look into the committee reports 

as to why the family members were excluded from the definition 

of ‘‘employee,’’ so I can’t really answer that question. 

Ms. BLACK. Okay. Okay. Mr. McCracken, any idea—— 

Mr. MCCRACKEN. I don’t—wasn’t privy to those conversations, 

of course, but I have to believe it is because the congress at the 

time was concerned about, you know, potential abuse, that you 

might hire an employee—a family member who is not really an employee, that kind of thing, and so they sought to prevent that. 

Ms. BLACK. Well—— 

Mr. MCCRACKEN. I should also point out, though, that it does 

work both ways. Because in companies where you have family 

members who are working in the company, more often than not 

they are in a kind of a management position. So not only are they 

not eligible for the tax credit, but they also aren’t counted in the 

calculation of whether you are low wage. 

And so, if you added them back in to that calculation, probably 

the average wage of the company would go up, but your tax credit 

would go down for the employees you can claim it for. 


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So, if you are going to think about a system that allows the business owner who works as an employee and the family members 

who work as employees to participate, you might need to sort of 

think through the levels, because you will wind up allowing some 

businesses to claim a credit for some of the individuals’ health insurance, but you might actually reduce the credit available to other 

companies. 

Ms. BLACK. Good point. And I just think that it is something 

we need to take a look at, Mr. Chairman, in particular. I don’t 

know the reason for it initially, but my experience with small businesses, of which our family is a small business, and that many of 

those that we know do have a lot of family members that are involved in the business. Thank you. 

Chairman BOUSTANY. Dr. McDermott. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Hisel, I feel 

an affinity for you. I worked for a gypo logger one summer. I see 

that you have been to the University of Montana and got a master’s degree and then you took an entrepreneurship course in the 

Montana Community Development Corporation. Did they have a 

course in there to figure out how to fill out government forms, in 

the master’s degree program or in the entrepreneurship? 

Mr. HISEL. I do not recall such a course, specifically. 

Mr. MCDERMOTT. So, the skills that you used were skills that 

you learned in maybe common public schools and eighth grade, 

where you learned to multiply fractions and add and subtract? 

Mr. HISEL. And divide, yes. That is correct. In fact, there is an 

addition symbol right here, and a division symbol. It is pretty 

basic. 

Mr. MCDERMOTT. And so, my feeling then is—why do you 

think people are complaining about this form? I mean did you get 

that card in the mail? Is that how you figured out about this? 

Mr. HISEL. No. I was aware of it from following the health care 

debate, that it would be coming. And I was quite anxious to be 

aware of it. But my accountant did know about it from receiving 

some type of communication from the IRS, I believe. So—— 

Mr. MCDERMOTT. And so why are we hearing all these complaints? I mean you are just an ordinary guy who learned eighth 

grade math and figured out this thing, and figured it out, and 

handed it to your accountant and said, ‘‘I think this will work for 

us,’’ and your accountant said, ‘‘Yep, you’re right,’’ and it cost you 

$195. Why are other people finding it so complicated? 

Mr. HISEL. I don’t know. 

Mr. MCDERMOTT. All your people work every day, 8 hours a 

day, 50 weeks a year? 

Mr. HISEL. No, we have—in fact, we have three full-time employees—that is one of the blanks—and then the full-time equivalent of part-time employees is simply a matter of finding the total 

number of hours worked by part-time employees, which is reporting QuickBooks, and you divide by 2,080, and you get the number 

of full-time equivalents. 

Mr. MCDERMOTT. So, it is not that complicated. 

Mr. HISEL. Doesn’t seem to be, to me. 

Mr. MCDERMOTT. And why, then, Ms. Thompson—I mean you 

got these accountants. I mean I got an accountant. Everybody here 


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on the dais has an accountant, I will bet. Bet there is nobody up 

here that doesn’t use one. They fill out a million forms every year. 

Months of February, March, and April are absolutely crazy at 

Bader Martin in Seattle. 

So, when they have done 100 of these, or 1,000 of them, what is 

the complexity then? 

Ms. THOMPSON. You made a very good point. It is the tax professional that is preparing the form. And to them, it is not complex. 

But it is to the individual small business owner that is accumulating that information that it may not be as straightforward for 

everybody as it is for my fellow panelist here. 

And so, that is where the complexity comes in. The complexity 

is when the small business owner has to accumulate the information that they don’t readily have available. Yes, they have it available, but it is not just picking up one number from here and dropping it there. They have to analyze it in a little bit more detail. But 

you are absolutely right—— 

Mr. MCDERMOTT. If you are running a business—if I could interrupt you just a second—if you are running a business, how can 

you run it without knowing how many people you are paying how 

much per hour times hours to give them a paycheck at the end of 

the week? How could you not know that information, to just hand 

it to your accountant and say, ‘‘Here is what I do’’? 

Ms. THOMPSON. You are absolutely right. There are payroll 

records that have annual amounts on them. But it is not as easy 

as just picking up that annual amount, because you have to know 

if the person had more than 2,080 hours because that person—you 

are not picking up the total hours. Maybe they worked 3,000 hours. 

But in your calculations you are not picking up 3,000, you are picking up 2,080. And then you have to look at whether or not you have 

part-time employees. And so those have to get special attention. If 

you have seasonal workers that work less than 120 days, they are 

handled one way. But if you have seasonal workers that are more 

than—you handle them a different way. 

So, it is every situation for the small business owners themself 

that is where the complexity is. But you are absolutely right. For 

the tax professional that is preparing that form, it is not complex 

for them at all. 

Mr. MCDERMOTT. So, if I want a deduction, I bring into my tax 

preparer the information about my contributions, and about my 

business expenses, and all that kind of stuff. If I don’t give it to 

him or her, I don’t get the deduction, right? So it is up to me? 

Ms. THOMPSON. No, it would be up to the tax professional to 

make sure you, as a small business owner, were aware of the credit. And if you didn’t provide it to the tax professional, the tax professional should be asking you the questions to get the information 

in. 

Mr. MCDERMOTT. So in the second year we will have some better data. 

Ms. THOMPSON. Second year it is going to be a lot better than 

the first year. And I think that is true of any tax law, the first year 

is always a little bit more challenging than the second year. 

Mr. MCDERMOTT. Exactly. Thank you. 

Chairman BOUSTANY. Ms. Jenkins. 


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Ms. JENKINS. Thank you, Mr. Chairman. Thank you all for 

being here. 

Ms. Thompson, in your written testimony you explained how 

small business—the small business tax credit did not provide an 

incentive for small business to provide health insurance. If the employer is even aware of the credit, you said they are not likely to 

know whether their business is eligible for the credit—and if so, 

the size of the credit—until after the end of the year. 

I would be curious for both you and Mr. McCracken to comment 

or elaborate on the challenges that a small business faces when 

planning its expenses, including health benefits for employees, and 

perhaps elaborate specifically on the effects of the temporary nature of this tax credit, which will expire after 2015, and how this 

affects a business owner’s calculations when they are deciding 

whether to offer insurance, given that the health insurance law has 

not reduced the cost to provide the health insurance. 

Ms. THOMPSON. I think I was answering the question from the 

perspective that the small business owner didn’t know at any point 

during the year whether or not they were going to be eligible for 

the credit. There are those situations that they would absolutely be 

aware of it. 

If there are less than 10 employees, and they know their com- pensation is—average compensation is less than $25,000, that is 

really very clear, very straightforward. They know they are going 

to be eligible for the credit. And so they would be able to calculate 

the credit, or the professional would be able to calculate the credit, 

and let them know how much they would be able to save, if they 

did have or purchase the insurance for those employees. 

So, that is the perspective I was coming from. It is that they 

didn’t—weren’t able to plan for it during the current year to know 

whether or not they were going to be eligible for the credit. And 

that is why we say, okay, it would be so much better for them to 

do that look-back to the prior year, because then they can plan and 

make a really good business decision as to whether or not to purchase that insurance. 

When you talk about the temporary nature of it, I don’t think a 

small business owner is going to be that concerned with something 

that is going to be happening 7 years from now. If it is going to 

be very helpful for them in the short term to be able to pick up 

this insurance and be able to take advantage of the credit, that is 

probably what they are looking for. 

As you know, tax laws change all the time. So maybe by the time 

this credit is scheduled to be repealed, maybe it won’t be. And so 

there is a lot of things that go on when people are talking about 

whether or not to take advantage of the credit. 

But our answer was perspective from planning for the current 

year, and whether or not to buy the insurance. 

Ms. JENKINS. Okay. Mr. McCracken. 

Mr. MCCRACKEN. I agree with part of that. I think that the 

temporary nature of the tax credit doesn’t have—play a significant 

role in determining whether someone is going to use the tax credit. 

But I do think it plays a significant role if you are trying to incent 

a company that doesn’t currently offer health insurance to begin offering health insurance. 


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Because small business owners are very reluctant to start doing 

something—an employee benefit—that they don’t feel confident 

that they are going to be able to sustain. That is one of the biggest 

issues, I think, that played into health care reform for small companies, is newer companies simply were not starting to offer health 

insurance the way companies had in the past. And as older companies have gone away, newer small businesses are much less likely 

to offer health insurance, because they have seen this cost trajectory, and they are very concerned that they won’t be able to keep 

offering it. 

And it is a very different conversation with your employees if 

they came into your company because you offered health insurance, 

and now you have to get rid of it. That is a much more difficult 

conversation than if they came into your company knowing that 

you didn’t provide health insurance, and being able to deal with 

that. 

So it is just a really different situation. So I do think the temporary nature makes it very difficult to incent different behavior on 

the part of the small business. 

Ms. JENKINS. Thank you. I yield back. 

Chairman BOUSTANY. Mr. Paulsen. 

Mr. PAULSEN. Thank you, Mr. Chairman. And, you know, the 

last panel, as well, talked about some of the complexity issues that 

are obviously out there when you have less than an 8 percent compliance rate, or an 8 percent participation rate, I should say, as a 

part of this tax credit. And it goes back to a little bit of that definition perspective of what is a small business, right? It is 25 employees, 15 employees. 

I just remember in the health care debate and when that law 

was being first debated, I talked to one small business owner. I 

said, ‘‘Well, how many small—employees do you have, as a small 

business?’’ He said, ‘‘Under 50, and I am going to stay that way.’’ 

And to me, that really sort of struck home. And now we are talking 

about a certain tax credit to help small businesses like Mr. Hisel’s 

and others, where you have a 25-employee limit. 

And Mr. McCracken, let me ask you this, because you testified 

about the difficulties that a small business faces in figuring out 

whether they are eligible for the credit, and if so, then calculating 

the amount of what that credit is. But moving beyond just those 

two hurdles, what effect do the employee and average wage limitations have on hiring or wage increases? 

So you got seasonal employees, you got family members, you 

have wage restrictions, you have FTE restrictions. I mean do you 

believe that this complexity—this could actually prevent small 

businesses from hiring additional employees, or increasing wages? 

Mr. MCCRACKEN. Do you mean the tax credit itself? 

Mr. PAULSEN. Just in terms of the complexity component of it, 

yes. 

Mr. MCCRACKEN. It could. I mean that is one of our concerns 

about having a long-term policy that provides incentives to small 

companies directly to provide health insurance. Because while the 

temporary doesn’t have much effect on their behavior, a long-term 

tax credit or incentive could have effects on their behavior. But 

they might not be what you expect. 


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So, for instance, if you offer low-wage companies a significant tax 

credit for offering health insurance, you are essentially encouraging 

low wages. You are subsidizing low wages for the long term. And 

I think you would have a very real effect, in that regard. 

If you are going to—and there are other ways you could define. 

If you subsidize small companies exclusively and have a cliff, you 

are giving them significant incentives to stay small, and to think 

about that growth, as you point out. 

I think on the—with this credit being a temporary credit, those 

kind of effects are more muted than they would be if this was a 

permanent policy, going forward. 

Mr. PAULSEN. Yes. And, Ms. Thompson, want to expand at all? 

Any comment? 

Ms. THOMPSON. [No response.] 

Mr. PAULSEN. I will just mention this, too, is I think that is 

fairly accurate, from the perspective of Congress is always thinking 

in short-term cycles. Is this certain tax credit going to get renewed 

for another 6 months? I mean this is actually a fairly unique credit. 

It is out there for a few years, and then it is going to be set to expire. 

And so at some point Congress is going to be asked to come back 

and say, ‘‘Well, do we want to keep it going? Do we want to renew 

it? Do we want to extend it to other categories, for instance?’’ And 

it does create the uncertainty out there from those in the business 

community that want to allocate capital as a part of just the overall Tax Code. I mean that is a factor. 

And I hope that, Mr. Chairman, we are going to continue to have 

these conversations. This is just one credit we are talking about, 

but it is an issue across the board, large companies and small. So 

I yield back. 

Chairman BOUSTANY. And next we will go to Mr. Reed. 

Mr. REED. Mr. Chairman, I am going to yield back. I am all set 

today. Thank you. 

Chairman BOUSTANY. Mr. Crowley. 

Mr. CROWLEY. Thank you, Doctor. Thank you for letting me 

participate today. I am pleased you are having this hearing today. 

And, my colleagues, if the worst thing you can say today about the 

health care law that we passed, also known as the Affordable Care 

Act, is that it only provided 228,000 small businesses with a tax 

cut, averaging $1,220, then it is clear to me that we have much 

larger problems on our hands. Because, in my book, tax cuts for 

228,000 small businesses is a pretty good start. Furthermore, even 

more small businesses will receive this small business tax cut. That 

is clear from the testimony that you have offered. 

But I am happy to use this hearing as an opportunity to spread 

the good word about this tax cut, and ensure we educate even more 

small businesses about the range of benefits available to them 

through health reform, so they can afford health coverage for their 

employees. 

So I am thrilled to have this hearing today to allow us to trumpet the health care law, and reiterate that we are all in agreement 

on two points today: the Democratic health care law expands private health insurance coverage, and cuts taxes on job creators, 

small business men and women. 


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So welcome, Mr. Hisel, to the Ways and Means Committee, and 

please give my regards back to Montana when you go. My wife is 

from Billings, Montana, and her brother lives just outside Missoula 

in Clinton, Montana. So, maybe a neighbor of yours? So welcome 

here today. 

So, you are a small business man who employs 17 folks, correct? 

Mr. HISEL. We are at—— 

Mr. CROWLEY. Or less? 

Mr. HISEL [continuing]. Nineteen right now. 

Mr. CROWLEY. Nineteen? Good for you. Was this tax credit for 

small businesses in the Democratic health care law helpful to you? 

And I know you may have already answered this question, but I 

don’t think we can hear it enough. Was it helpful to you? 

Mr. HISEL. Yes. It continues to be helpful to us. 

Mr. CROWLEY. So how much did you see refunded from your 

taxes because of the small business tax cut in the Affordable Care 

Act? 

Mr. HISEL. Over $2,000. 

Mr. CROWLEY. Over $2,000. So is it safe to say that this tax 

credit made it more affordable for you to provide health insurance 

to your workers, and without it you might have had to give it up, 

or give up on providing the private health coverage you give your 

employees today? 

Mr. HISEL. Yes. It was on the chopping block this year. 

Mr. CROWLEY. So we are hearing from a few people that not 

enough qualified small businesses are applying for this tax credit, 

and that it may not be worth it as it may be too complicated. What 

do you think, again? Is this tax credit worth it or not? 

Mr. HISEL. It is absolutely worth it. Not too complicated, in our 

experience. 

Mr. CROWLEY. There is a charge in the House of Representatives to repeal the health care law as we know it, known as the 

Affordable Care Act, to eliminate all future benefits, such as this 

small business tax break, and to reclaim all past benefits. 

And I would allude to H.R. 2, which—I would think that Mr. 

Cain would have no difficulty reading this bill—it is on the second 

page where it says the act—‘‘Such act is repealed, and the revisions 

of law amended or repealed by such act are restored or revived, as 

if such act had not been enacted.’’ An entire repeal to reclaim all 

past benefits provided, such as the money you got to keep with this 

tax credit for job creators like yourselves, small businesses. 

How would you feel if Congress repealed the health care law? 

And, once again, let me quote again—‘‘as if it never was enacted,’’—which experts have said could be used to force people to 

repay any benefits they have received like this tax cut or the $250 

check that the seniors in our country received to close the doughnut hole in 2010. How would that make you feel, if you had to pay 

back that $2,000? 

Mr. HISEL. I would be absolutely livid. It would be—— 

Mr. CROWLEY. How would it affect your business and your employees’ well-being, having to write a much larger check to the IRS 

to deal with the small business tax cut that my colleagues on the 

other side of the aisle vehemently oppose? 


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92 

Mr. HISEL. That would be absolutely infuriating. It is going in 

absolutely the wrong direction. I believe that the ACA is an actual 

stimulus to small businesses. It has helped me. It has reduced my 

premiums. And I would be absolutely infuriated if we went backward. 

Mr. CROWLEY. I thank the witness for his testimony. I am 

pleased we got the opportunity to hear from a hard-working small 

business man like yourself. 

Let me just for the record really point out other benefits. No 

mandates on any employer with under 50 employees to comply 

with this. No more health care decisions will be made by HMO employees on the phone, but rather by patients and their doctors. 

Children can no longer be denied coverage on their parents’ private 

health insurance because of a previously existing condition, like 

asthma. Children can stay on their parents’ private health insurance until 26. And the list of benefits goes on and on and on. 

I thank you all for your testimony today. 

Chairman BOUSTANY. I want to remind the gentleman that he 

did raise prospective legislation, which has been under consideration, and that is not the purview of the Oversight Subcommittee. 

And at the same time, I would also remind the gentleman that 

the—Mr. Hisel has a non-profit entity, so that some of the tax considerations you proposed would not apply. 

Mr. CROWLEY. If the chairman would just yield for a moment? 

Chairman BOUSTANY. I will yield. 

Mr. CROWLEY. I was just taking the opportunity to point out 

the benefits of the law that we passed. So I thank the chairman 

for yielding. 

Chairman BOUSTANY. And we have better proposals going 

down the line. 

So I want to thank the witnesses for being here today, for your 

testimony, and I want to remind you all that—please be advised 

that Members may have written questions that they will submit, 

and your answers to those would be made part of the official hearing record. 

Again, thank you. And this hearing is now adjourned. 

[Whereupon, at 12:45 p.m., the Subcommittee was adjourned.] 

[Questions for the Record follow:] 


dkrause on DSKHT7XVN1PROD with HEARING
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dkrause on DSKHT7XVN1PROD with HEARING76181A.047

II DU~ D"'Ol n,~' 011 ~)" onll Moon .. SlIb.,.,Mln"nu "" o.'~I"8l~hI 

Qur:o;lion. for lh. M..,ord fn"" Ch~irm~1I 8",,".n)' nd Rf<,,""" from 

Ms. 1'~1r,d~ Th"n,p!'4'''' Chair AICI'A Tu £ .. ull. ~ C",nmit" . 

Am .. l<on In,.i'UI .. "rCPA5 

I. , ',mr , ... tl ~n ' ''''tin.on)' hikhlig/lt.-d lh. m n,I"""" or 1I"',mining flig,b,lUy fO' Ih. ,'moll 

~ujln O$!l 'II< ... d i'. In f ... " Ih. I ItS 11Ijlro<' lo ~ ' 0 I'" .m 8'141 . IODO • •• elgh' P"~ '''' n~. 

~' kind..r fe.'dbatk h~'" smo ll businfS>e!I bet-n Ki"ln~ y.,u on ,h .... Iut of .hls ",..di,! t\.oo, 

p' •• .e <omn>~n' on 'he 00'" small buslnr,;,,,,, incur ' " d,'orn,in. nd ",oln'.'D cligiblli,y for Ih • 

• r'flIil~ AS a H"«n .~. orlim< spen, b,.. "oid "rofcssloul on ,h. 'olllm1 

A, I .l3ted al Ihe hearing, for the "'''""ye'' \\ho perf<'CIly fil "ilhin the 1IIlI1"owCQIIS,rainlS of the I.w, Ih. 

ortd lt i, he lpful. Howe..-•. for """y jmall . "'pJO)'ors. Ia.~ oompllance ."",IS ".". o"'. lod WiliIQul on 

oni-t ltin ~ ben. "!. At.!"toiI b~ "no of my ,<>lIeO/>" •• , "",.ny li~ lh.", "'as a 101 "fwort f<ll" nOl a foI of 

rtlum.-

~ AICPA diloe. 001 :.:al cr .ny >""oili" dgla .,.'ilh "'lI"rd ,0 Ihe «1m Sm;lll busines.w> ir.<:urlo detennioe 

OIld MI_;n""n ~Ii!!ibih(y for I~' <rod i!. t lo,.,~ ,"C •. <lU, ",.mbon h"~o lold OJ" lba( il "'"os '''If u""ommoo (hiI 

r"ar ror I;lx J>rt""no" IQ h~, .. 'IX'm "p ,o!11% or lhe (ime CC~ry 10 p",,,,,rr an cOlin: "".11 busin",,' 

",(urn j."" on Ih<: cn-dil .akul~lio". (lnl), 10 IC~m (hal Ihe oIi.n( did n<>1 ~"cn qualify ror Inc crcc!il. As 

...ch. m.oy "m.1l e"'pIO)"cB fcillhe cnli", process was a f"' ;I k:,;~ cllon ()r wasted ""'I"'nsc. 

2. In hor wri non ' '''''mony, M .. t"grl'" on.'nlinnod INS o,,'rnoh dfu rl • . , urh ~ • • ,. ilings, 

" ·<I ... a<1",, an,I IO,,'n h"11L INS h ' modo ";gnifi •• ,11 err",,, 10 'I"'''. forw.nllO g<1 infornl. lion 

01., '0 'U 1".1' .... '" .nll ' ln oll b" , I" """", 'I> nol ... W~ •• n .... 100"' Ihe rrttlil. VIM, .. i.b . 11 Ih i .. 

p"n",il,",ion ... " .. ""'low al,bi .... · .. ago. 

Is 'h" . n.lb,lIab .... u In, um.lnl m. " .. eh u d inforn,. ,ion bfillg g" 'r n '0 1I bu"lnHl ... ." I, 

il beH" .. (b .... di. Is ju .. 1"" ."n'pl ... dd D1.11 bWl'''.ss" h. ,·. no" .n h~ "r"flll ' 1lH-.u... 

<I f .ho «>n'plnlfy lind m " ? 

OUT 01."' ....... ilQugnl the I ItS ; ft"uld bI: ('I)mpli"",nltd on rr'wlding , u,uonco On "'" appl"'''ion of'h. 

Crtd!1 ~11d al~ on i"foTmin~ ta~piI)'ers and ,a~ prolesslonal. on Ihe .vailabilil,. "flh~ omllt. Wt do T1IJI 

think Ihe IQw I"'l'1i,ipaliOfi i, duo 10 insum,i.", OUI",,,,,h Or in!"meicnl nfoTm~hun 

~I.n y .mall bu.i,1<.'S>e. I!J.d not fi led their ,"x rtlum, Ihrout;,h th" period j(} il is too eMI,. '" '~II if lhe 

oct",,1 panldpat'ol\ for 2(110 \\111 bo low. 1I""'evt1". our t"o",b<~ Ii>UnJ lhot the ... "I'1"! "PIlll""'ion ""! 

oal'fowly d~ ",cd .... ulling in mOllY " flheir die,,1S no1 bein!!. able to IIIh "'h"nI.g~ or,he ."""il. OIh.r 

reasons fur no1 olnimintthe ortdit 1M) i""IWo that IItt small boll In';;, ow""' Jid not !pttk prolrs,iooal 

... sislaa)('t 10 undc:,,'and il,. ;",..."oflhe 0"""" <!I' 1I..,Ir paniculor ,illl"lio" or m.y h., • .x..,hlod il>allhr: 

"')jI ofpfI'p/lrioj; II.> ""Ic ulal;"'" ouh'('igh,"<l 1i'I<' bonet;. 10 I>< " ".;ved f"'", II>< emli!. Othe", may lI<ll 

h-1"c P"rtho.s\-d rn.'lIlth ;n!uro''',"o b«au~ Ih,.,. ",,"Id 001 be l~in u"'iI ofter Ill< ood .,rn~ }'car Ihal (h'~' 

"o<Lld 1:0< cli ibl" I ..... Iho cmlil. '11,.. "",<lil t1 "o",pl", amllhc AICPA'l r. ~ I'olicy CPn<cpl on Guiding 

P,incipl<'!< (or T;n Simplir.""'i,m SIO",. lhal oompkKi'y mar ""\~r le, .. I. o(,olun\.1)' conlpliMec. 
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dkrause on DSKHT7XVN1PROD with HEARING76181A.048

J. In y" ur ,,'rlllrn , .. ,In, .. n)' YO " ," '~, o.d ,b"' n, 11 bu. lnrssu a ,.., .. fl<o disI1rul"'rliohMl.l), hurl 

I,), the <on.pl ~lty of ,h. IU roo t., b ...... u .. · 'hey or. unobl. , .. hiTt' or Ihe)' do no, h.". ,h.· 

rHO ur ~ 10 hi,.., ,h. Gunlbu .. f In p,..,pa,.., ..... ~r< .. un'~nt .. la ... )' ..... and ad,'I:;o n; 10 n~' ~3" 

Ib r"ugh 'he cod •• 

Also, Ih ~ rod. Is .. 0' t>on «>n. I" . n' lu d.nnlng. 1I btl.ln.so. r or .~ mpl . Ih. n su,.., h e ,..,dil ddlnos M.m.1I bu ln ~M as .. no ,,'I'h 500 or f."'rr emplo)'O'fl, bu. for Ih. pur"""", of an 

A,..,hor M.di.al ing ~ ac<nun', a bu.in. ". ,,·i,l, f,·", .. Ihan 31 .,,,ployee. I •• smRIII,u. i" .. ,. 

rlu se «>mmr,,' on h ..... 'ho I~ ~ oo<l.'s «>,nl ll.~it y . IT",," smoll . mplo)·.""" nd h .. " , 'h. 5n •• 11 

bu. ln.,;. IU . redlt ~dd, 10 Ih~I <omp"'~II) . 

Ma"y small b\,,;oe.m:s tlnd w.- complinnce chall.1!glnJ; as ,Iley lock lhe """",n:.,. 10 co"'Vly w;lh lh<: 

rules. U~I;ke I:lrger bu!im.'SSes Ih~ 1 have dedicJled !.I31fl\! handl. I"'yroll. <IttO\!I1ling. and ta~ i!.SUe$ -

"'l1I\y mall bu.ine<;, ow"..,...-handleall oflhe<;. funclions in addillon to running lhe "",if\eS.l. 

The .. ,~1.l1 bu.iness 1:,)[ credil d~atly adds rompl~Kjly 10 lhe Coo.. For .xampl •. Ille delinil;o", of eligible 

.onall employcr. full'lime e<jui,'ulenl ~nlployeCi. a"cr:tl:e annual wages. and employee are not 

'lnIi!;hlfDl'wIlrd or ron""~1 wilh OIn'" provi,iool rlh~ {'o.k. Addllional roonplexlly "'~UI15 fr()nl th~ 

ph.~~ oul "f Ih¢ credil ha ....J on Ihe n""'~r or enlpkl}<~ urKl ~",mJ;c annual "'ages. C.lcul~tiog the 

employee. hOU1"8 of ",,,'ke also ,ntt<ic !he <...dil dlfficuh 10 "PI)I) ~" ,nc "",,,b<:r of atUH"'\ houl'S ","rked by 

em~ O)l~ is """" nOt ,,"\ld;ly avaHabl~. Funhermo«'. ,n., use of <,u1TI.'I11 } ... ~r iMormation did"", provide 

an inrenti,·e for lite smllil b~.i......s own .... 10 purch_ "."hh irn;umnre durlnr, Ih ... )'ear Jin", Ihey did no! 

know until ~n~rHlI." Crld orthc y~ar "helh.roenOl they wou ld recei,-" Ih,' bencr.t of the .-,..-.lil. 

Then: ~ also "" quick ,,'elhod fer .. noll busine;sus with more Ih,n Itfl emplo}'1.'C:S to delennine If.he}' a", 

eligible. JnSte,'\' ""..,\1 bu~lniSSeS someliones incu,"", ';gnitieanl time in !\'Illlerins nr~mlati<>n. The". 

lhe CPA. ~d ~ ~pcrKllimc on an~Iy".;nJ; the data ~nd !""'forming Ihc <~lculali()r"'. 

If Ihe c~il "ere m""" <impk •. ffiltny "",,,II hu>jn"~,,,,, ."." .1 "J)<'l1d 1<':>. II"", ~all><. .. ing ,Ia, ... Mo.., 

imporTanlly. lhe ability 10 do(mni"". eJii\ibilll} .-;t,ly in Ille year would provide an ine.:nli,·c fbr small 

busincs>1.'5 10 pu .... has.: health iruunr ,,:~ IOr'l·mpl.\), ..... 'S . 

... In YOH r;ltr~ '.,,'inlOny you "-, pla lncd how .he small bu lnes~ 'a ~ emit did no. p ro"idr an 

e~Ql i, ~ for .>n,.11 hU i~ .... ~ 10 prU\;d. bnllh In 'c •. If 'h. rm,.I.0.,-.r;, .Wn a""ff of ,~. 

er<~lil . YO li ",enti,,"," Ih •• 'h.,. ar .. nH' Ilk~l y tll know " 'hrlber .heir bu. lnrn .. 1i~lbl. ror Ih. 

cl"fllil u ti if ,., .• he si ~ of 'h ~ " .. r<lil u~IU " n . .. Ih. r od uf lb. ,·rIO ... rl .... ~ . 'abunl. on ,b i~ 

poin •. 

llte primary problem i, Ih~1 e1l1 plo)= cannot delermioe "he,her lhey wiTi be eligible for lhe credil umil 

lite cnd of Inc )'''' ..... ftcr t\M::.. havo .Iread)' mQde ,'''' d""i,ion "h .. ~h,'f 10 porch"'!. health ioj.Ufll''''c. As 

P""iously mcnlion(-d. lhere is no quick method ror small busint.'SSeS wilh mOTe Ihan ten employees (0 

dC(~"frI\ ne if lh.·)' ,.., eliti hlc, 'rhcse on~1I bt",in(."'S<'~ gen .. 'fi<lIy mU,( ,,~It anlil fl~r Ihe ~nd l1f I~e y~," in 

,'rdcr to kllOW Ihcir numher or cn,p!oy,.., .. Ih" e .... 1 " "mbet or huu", wooed PC' co' plllY ...,. ~rId Ih .... ~unl 

wag~~ per .. "1tlployre_ All ()f Ihis infunnalion i< ,",cCS$Ill1' l() delmnioe eligibil ity lor Ille small busi,,"s 

hCll lih insural)Ce credit. 
95 

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[Submissions for the Record follow:] 


dkrause on DSKHT7XVN1PROD with HEARING76181A.049

0"" simple SI"P l!l hdp achio,'e ';mplic;!)' ,~ould be 1<I .....,prior )'ear<iala inSlc:Ill o(culT"nl year dalIO. In 

oddi,i(ln, lho Ale .. " """In,me .. d., 1I\lOi ~.",. oM.>'d<r "".i,'$ lh~ d,fini,i"" "r s",~11 busi~ (I" l!f<''' 

",celpU. In St~';Id of p'hm"G infom'~lion on ilS number of full-tim •• -qui".I"". "mp!O}'e..-s Or its a"'er.r.g~ 

Ql\nua) wa~~. ~ .. na li ",n~oyf1" <()LLld ~ 1M gross """"'pl, omOW1t "'p.J01N "" ill prior ><ar ta x MUm. 
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~ NAPEO :=!::"'...:.... __ 1'01 100ft" Sal", .... pn I" .. , 

"""""",10, VA un. 10l/1J6.G'66 y. """'_.0'1 

Statement for the Reco rd 

Ways and Means Oversight Subcommittee Hearing 

On the 

Smnll Busine.'u Health Insurance Tax Credit 

Submitted by the National Association of Professional Employer 

Organizations 

November 15, 2011 

The National Association ofrrofessional Employer Org~ni~alions (NAPEOI submits (he 

following SlarC1l1cnl for lh~ rcCQrd. 

NAPEO is !tIC' nliliona l ll'l\dc association fur Ih<.- pmf<'SSional ('IHplo)'cr organjZ<llio~ \I'EOI 

i!KIllSlJy and (he voice of,lI.., 1'120 ind\.l5try. NAPEO h:lS "lOfC III.m 300 PEO tn'-'1t1~rs operating 

ill an 50 Slales. represcnting more lhan 85 p"I'CC1l1 of,lIe industry's ~81 billio!l in reVCIJUCS, 

NAPEO's 1'130 members range in $;%c fl"(>m Slan."p PEOl; to large publicl)\ held compllnies. 

rEUs help small_ and medium·si",-~ bu;iin<"l!Sl-'" with human ",sources, ~oml"''' \.lIlion , wKl 

employee bcllCfi~~ issues Ihrough a ~o-emp o~mNll ~mngem"nI whereby the PEDs assume \V-1-

cmplo>'er Slal"" for Ihe client's work~ile emplu .... e"' •. Employer ,."pon~;bilili"" for rhow wor\.;silc 

~mp oyee5 are shared or al localcd oclwecn [he cli~nl and (he rEO. Through ecooomics of scale. 

I'EOs ;m(11"o,·" compliance with cd~rnl and Slale (a.\ and bel'l<!nlS laws 3no.1 ofkn pro~idc 

rctiremcnl and hcalth bcllCnlS thai were 001 aVHilablc to lhe "OIkeJ!< prior [u [ill.' I'EO 

amusemenl. I'EOs collce( employment l~M'~ from [helrcHenls and remit Ihe (U.~es 10 lhe ledcral 

government underlhc I'EO's Emplo)'er Iden[ific3[ion Numb.:r (EIN). This racililates lax 

adminis(rnl;OO by reducing thi: number nfr<:llIrns processcd and by reducing errors in calculnling 

employment \a.~cs. In addi(ion, compliMce;s impro\<cd by /lCCCICralinl! (he limingofeoi!e<"lion 

ofemploym<'111 [axC$ becau;;e EO~ dept'S;( laxes more quk ly Ihan their small business clienlS. 

T~ hearing 1Ixlay ~ In e~amine Ihl.' fino.lings of II repon (~(l11-4t)..IO]) issued on September- 19, 

20 11. b)' (h~ Trcru;ury Inspo..-..::tor General ror E'3~ Admlnlslr:l1ion (TIGTA). Olllhc 

impkmcn(8tion ofll\o: Smalillusin"~ H .... hh Cun: Tas Crt<li( by t~ IRS, One of(1;e fil1djng.~ of 

lhe rcp(ln is (hal ~",an bu"jnc§s client;; ofl'£O;; muy fond Ihe) arc tPrgc(s of IRS enforcemenl 

cffons d~~igned III addrt'Ss employe/"$, ,,11<) dn nol pay "mpJo~ment tn)(es, I3~Cllu'" lhesc .nJall 

businesSi.'li do nm fik elllploym(nllaS n:turns, TIGTA SIUlCd (hM (his p1\)blell1 i~ caused in pan 

by (1)(' inabili(y of the IRS to link a small business di<'11t 10 Iht" I'EO wilh "hieh il ConlnlCI$. 
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In 2007, TIGTA isslICd another ""port, /mpro''e.lllems /lUI.., Bff" Moo .. 10 MonUIN' Emp/U)'l!rs 

Thill u.", Pro/el·JiOlWI Emp/oy"r 0"8"";:"';""", 1"" Mure C,," Be lJu,rc,!2007-J(J-!(j<)) tl\'lt 

r;:COgnil.cd that I'EO client, and the IRS lire ~t,lncrabl~ U! non-payment offederal cnrplo}mcnt 

laxes by l'EOs, bccou!'C under Ihe rcgular;ons, Ihe IRS-sonly rttOllr.IC in the evenl of "EO 

failure 10 remit employmenltaXcs is 10 COlic'Cllhc amounL< d,,~ rrom Ihe PEO's clienis. TIUT A 

al>a reported lhal sc\'cml SlnlC;; have laws lhal require bonding and indcj"l\"r.dcnl audits f"r I't~ 

IIIl11 do business in their Slates. 

Fnrttlnatd)" lhere is lcgislmiolltMI "·,,uld address mnny ofth<' CnOCCnlS rni,ed by TIGTA, 

Rep""~nt3.ti~es Kevin Brady (R.TX) and Mike Thmnpson (O·CA) have introduced The SnlRlI 

Busine;;s r:mciency Act of2011 (H.R. 2466, to crt'lll': a volunlary certification PfOl!nlm fOf 

l'IXI5 within the IRS, I Tu ~CUIl1~ IItS-ccrlified, a I'EO wuuld have tu ml",t fmancial standimb 

(iududinJ; bonding and indcj"l\"ndcnt finMcial .... udil ,..,quif""mcnts) and satisfy rep.lr1in& 

ob]igation~ and olht'r approprialc stnlld~rd~ SCI by Ille IRS. The!ie reporting requirements c()tlld 

i[}(:ludc re-porling <'Ifill<" EINs of a I' EO's client5 lIS ",commended by Ih~ 'IIGTA report. 

Under Il.R. 2466, ~:cnifjed i't:::Qs wQUld t:lk~ on ~Ie liability for IIw collection ffl'tl~r~l 

empluyrnenr I3Xes fm worksi ~ cmplo}~ performing servict'S for lheir rEO clients. Small· und 

metliutn-S;/.ed busine>~ di~nL" that ~..,rt1ra<;t with ccrtifi~'<I PEDs would be assured 111m the) 

would nul Ot.-liabl<' for cmploymcnt ta~<'S "Iten the rEO has accept~d that n,sponsibiliIY . This 

pruvi~ion ",ould help addres~ ulle of the findillgs in the TIGTA rt:purl I!cingdiscusscd in tod:1Y'$ 

he~rins. TIGTA fOlond thai small busino:sses using f>EOs were "'ull!\C\:i."Ssarily"' fill1illg imo an 

IRS cumpliancc Pl\lgrdlll dl'Signed to idl'mify alid audit cmploycn who :Irc nul paying Iheir 

cmplo)'mCI1I taxes. TIGT A c"lIed this "'a "-aSIC or IRS resources" and "an increased burden (\II 

tllOS(' affc.:le<J taxptlyers"'-mcaning tIlesmall arid midsil'.cd bus;oess diems ofPEOs. I1.R. !4t}6 

would afTord protection 10 busincsii/,."; IhalUiOC IRS·certified r EO!; from such enfo=ruellt. 

NA I'EO slrongl)' supports It R. 2466. enactment Oflhi~ I~gislntio" would ,,-"Sult in improved 

compliaocc with fedcra] lax law, grunt legal ~talUS ",ilhin the IRS for PEDs, and c",al~ ~ $lire 

harbor from I ItS enforccment on Ihe p1)'menl ofempln)'mcnl UlXCS for ""'311 businesses Ihat '-"S~ 

CL'f1ifi .. ..J PeO •. 11 9dd""s<-'S sc,'craJ of lite pmblclIIs ra,ised by rlOTA in illl .-cporl in 2007 and 

!he reporllh3t is !he focus ofloda~'s hearing. For 1]k>SC ",;,sons, We ~sk th~1 the Way" alld Means 

C;omlllitle~ n"';IV'e !{"".-ard on c""sidenllion of I·I.R. 2466. 

, C""'l_ "port"'~ "P .. , ....... , roo-:! l!to-s....t .... rm« .... ('<'"&r'''''''' """ jolo,uQl '" '""_ ~ ............. Ily 'ho_.(8. 'W!I) .... t-.,.;"'~j"I ... _oIC_b) __ ~G~(R-IA ) ... 18;)IN'1oonUHI.L 

, 
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NFIB 

The Volo;eu! Small Businus. 

The Hon"r .... bleCIwI~5 BOllS!:m}' 

Cllalrman 

Way. &. Mcans Suboommiuee 00 O ... e",ij!,ht 

U.S. Ilouse ofRtpresenlati, ~s 

1431 LoniWorth tlwse Office 13u;ldi~ 

W!iShini<loo. D.C. -::0515 

[)care".;rm.n Boniilany and RallkinJ!, Membc:,-lcwis: 

The II"""rdbleJuhn LC"'is 

a,, jng Mtmber 

Way, &. McansSuboonuniuL'C 00 O\'e",ig)u 

U.S. lIouse ofRetl~sentali, ~ 

) 4J Camlllfl lloolW Office Uuildmil 

W$h;l!i'lon. D.C. -:!OSlS 

On bchalfoflhe NaLional F~r:llil)l\ "flndependent BLl.inc," (NFIB). the ".Iion'g I~ad;ng small 

bui,n,," a<!VI)C!lCY <XgllOi~lion ..... e wril~ locI.y to I"<'pon t~ findings ora July 10\ I NFIB R<'seIt~h 

FWlIIlaliOQ su ..... ey l"'g;.rdinS!he I'aliem ProIection lind Affi\flJahle Car>: Act (l'PACA) ~nlalJ business 

l~x c",dit's impact on sm.1I business and \heir ability u> niT.". hcahh insunll",ec"''''''I!~. We bdieve \he 

.urvc~. (im" " ~" . "",/lIe"I," Ilc' "'''/k~~ OM l',,"r .:tilI,-.,. FJ>j!t'lm"'" ,!/PP,tCA, at~U"lldy 

ciemtKl5traws small busines.; ow,.,.". rcaclioo w the Pf'A('A ~mul1 bus;nt"Ss ta~ credi' ind is \vified by 

IWo rec"nt £O"tmmCTIt anal,.~ 

Tht high to.t orhulth in!umnce "'mains a tup problom for~mull ~mplb)e" and ",jlllikd), ",'m~in Sf! 

for u long 'im~, Ilowe,'cr, PI'ACA', ~xlrwrdinaril)'tomple~ smull busines,s Ull credit oflered lillie 

inc:emiv~ '0 P'Jr<:ha$C he~ltIt insumnc:e fur ~all firms cu""mly n<lI o/TeTing cov..mgt. Instead, il serves 

almost ~xclus;vely n~ wi"dfull for small h".'ne"". who cu""mly on'., ""VC"l~e '0 empIO)lu" 

Thol're!ld»nl', Coullcil ofENtlOlnic Ad~jsorscSl;,n3,"d .W .... f<)ur miliioo £Inall oosil\cs~ " 'ould be 

eligible for the I'I'ACA small busi""ss tax .:redit, Il owever. OUr survey found h~t far fewer than ibur 

", illion 5Inoll .mploy.", are eligible fQl'lhe tax oredi,. We eSlj",",cd 111.:11245.000 smsll bu.ine"", •. or 

I<:s~ than S ~",en' of tile small busine" popul~lion. ale eli.i;illie for II~ futl PI'ACA ~m~1I business laX 

credit. Another 1.11>5 milti...". or I lillie ov~r 10 p<n..,m ofth", populotion. 8'" eligible for a p.onial 

credit. The <.'Slima,e of far r"'h'l' than fout milliOll W3S w";fi~-d t>¥ a Sefllonlb<... 201 I Sm~1I BIL<illCSS 

Adminis!""ion (SBM om"" or Advooa('y "'p"n t;tk-d I/~"'Ih J".",..",c~ hI ,,,,,5,,,,,1/8,.,;,,,,.s J/"r*~" 

A,,,I/abili(v, OJ,'<'n'J:<!, <)"'} th.>. t;{j;"'t qiT{JX /,IlWJI/w!s!hQI ~im"H.-d 2.1> mill,,,,, fLnns "ill becllglhJe 

forlh. panialll't"l'lit. 

Tbe lower esIim,:tles by tIlIr R""".r<:\1 r"""d;,\ion .. ,d the SRA omo~ of Ad"",acy "'port oocum:d for 

n'ulli!'l. reasons. F.lijj.ihility f()T the cnodit i, based 01\ a complkated combinntinn offour teslS: (1) the 

offer of employee h<-alth insuraoct. (2l fe,,'er 'han II ,,",pl<lyc'e!/ for tbe full credit pha5io.g Out alld 

caPJlCd at 25 ~",plo)'us, IJ) ",,,,,,se ''''I\lal "",ployee ",ag~s "r$"'_',ooo or k'SS pI""itlg "ut ""d capped 

S",j~ .... II'''''''''lio" or Ir.cI~ ... O",i".,.., ,. ~_~ ... '_1<>' '_1>(' lI"'" ')II!,""""" · " ,J"l· __ '~~~~ t'_ 
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al $SO,OOOand. (~i empl<»'~r I"'ymem ofal 10",1 50 pcra:nl oflhe .mplo)'",,·~ health in,urance 

p .... mlull\. Th~ AJmlnlstr.lliOll·~ 0511m31. rna)" ha,o ~n high ~~uS<' tho IRS did ","l,a¥o nt~dyacc,~ 

10 datu lluol :oJiowt<l ill" ;Jo1M));nc which b<u;;n~SS<'S tMt til tke: ,;i¢ and awmgc "alOe p"rnmolc"fS 

",,,,,,,lIy nlTcr heahh in,,,,..,..c. "ffer Ihe righl kind ofhealih in,ur~o<e. or emplny fumily ",e,,,b.,,,, , hnl 

",/)\>Id disqualify Ihem from c .... dil elilOibilit)". 

Dcspile ~n 3wessiv~ ctlu""lion and oUlfl'ach onmJlllign by tIk- Admlnis' '''t;<lII, the at"",1 rtsults h~¥. 

Pcen even mn", ""de"",helmi"\< Ihan C,t;0l3IN. ",ith 309.000 UI~p.l)e~ claiming the «Nit .. of"'idOo~r 2011, 30oO«ling 10 Ihe T .... asury 1" ,pcc I()l"Gffi~fltl for Tax AdminiSlrallon (TIGTAI tIl,timOllY, 

"Ibe IOJ" ,'olume of cl.im~ <k[lC'~ <lII' V" ritlY offacrors - Ihoooomplc,,;,y oreakul"inlO ,he c.,..,d;\. the 

Icmf""lrllry n.lUrenf(he c,."dit .• mI,he mlcc-n"in futn,enftnc hca lU, in""'lne. marlo:ct .fier lhe p", .. gc 

of PPflCA. 

C"", ~.\ il)" 

Sn ~11 emplo)'Cl1 C3nnrn oasily delcnni"" the "31"" "fthe m,dil. ""oNing to 0 ..... ~"'YCy . The Omo"n] 

of,lI<: ~rNil i501l~n unknown un,il a oo",pl~x oalculollon Is mad~. 0..., survoy found more ~m.1I1I 

"", ~in~ o"n~~ h~d inll'll'Si in pu.,.uioJ!; a hypoth .. "\;~al, imply OIlI'III:lurro $1,500 cud;, per full·,Ime 

cmployN." than pu('!;u;n~!l1e I'I'ACA iIm.1I bus;ne!l!! I/I~ « .. '!lit. OUT u,w}' flSulls.tt 'e-riliccl by lhe 

11GT A .... pon' ~ lindings that ( I ! IIIXp11yen arc unclear 0Il1h<! specifics of lhe i."1<'dil and (2) the .. -n-dil i5 

lin, WOM lhe ,un" and dl"un to claim as ,""lI pl~ '''''Po are "''1uired 10 calculate il and "",.on wOfuheclS 

mu .. bo:.comploll'!l In Oldc't to claim it. 

ThIIlempc,.-ary credit will ,'f\lde <wer .im . lJttau"" il is I(""'porary In nal=, ""pirinS in fQUl" 10 six 

)can;, de"endinS IH1 cennin oin:umstn",,~. il "'''''5 001 QPflI.",ilo "mpln),ON "h,. do not of!", ;nSUNne,·. 

1M~ risin!OCl>!;, ofpro\';ding insurarn:e is a d<:tem:nl for many .small busin=s 10 beGin olTering 

in."",""c. A lempuf1lry. largcI.d.ax cn:dit does liule to nlTse! ,n. hi&h co., of beginning to pro,'Ide 

bnhh In~u"",oe and Ihee~piralioJ\ ,,(tho oll'dil "1'111 ,..,suh in a si!;l1lrk.ntinc"'3se in t...allh if1!;uranC1! 

CIl$iS. TIle SHA omo" I>f Advocacy l<"n,O, "It n:m~ifti II> bo:. sc""n "~h..,, tt>e provisions io F'"li"",1 

t\e"~llh cart." ,;,ronn will "" iufficienl to ,,'"",rome Ih,' b:..,.; ....... 10 "",at! bu.inc""," otTeri ~ he"l,h 

Insu"""",, to It...ir elllpIQ)"OC$ ... It... unpredictable ""'IS associated v. i1l1 pl1l"'iJil\l!: heallh I~s ,,"n"" may 

~OI1 inue to de'e'" . ",,,11 b-usio<"SS<'S from ,,1T"";nll r....lth insuf";lnte 'o ,h~i, ~"'I'IU)'~.~ This ruult is 

roll5iS'~OI w ith tho SUA Office of Ad"""",,),'. findinp 00 Sla ~ I:I)t i"""nl;".o fornrre,inll. hnhh 

insuf";InC1."". v.hich have gel\emlly not lend 10 'n<rea"". in fl ~ring rate. bo.... au,;e Ihe le,'cl ofincenlive, 

h ... bo.... n , ,,, all compared .0 the c'>s' of offering ..... n ... gc. 

!'unher, Ihe SI3A Ollie .. of Ad,"0C30."1' "'ported Ihal ~m"lI .mp oy~~ may "" ~lu<lant 10 offer he.hh 

in;;"rune. 10 ,lIei' ""'ployc<$ ~au"" ofu"o<"",n!y aboul tho dl ....... rs of PPACfI. S",,,II emp uy<~ m.~ 

w",a;1 and sec" wh<'1hCf e~changc. ar~ orealc<i and viable. Other ",,~II rom," m.y not olTer Jll."w 

Nad.,"" t·W ..... "'" nfl"""n<IIIktl, Uu" ..... ,'" "_ ,,. ' . ~o\ - ~,,,,, """ • . -.' ....... . , .. ....." ........ . ~' "''''. 
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emplo)'e.. benefits due 10 ~n unc~na;n """'\OI11yand tax "lid "'J9Ibmry cn";rorum'''L Un<:<'fI3imy 300m 

fUIUO.' <0$.1$ af hMilh 'nsulllJ1ee .... ilh lhe d<-vdopmcnl M e.",hangcs ~nd <oSlS aflhc ~$scnlI31 11<-.l1h 

~ncli'lX'd,ag" is p"'vcnti,,~ OOf1..,rrcring linns from i:>rgil1ning u,otTcr the b<.'!IeliL 

A<e«dingla "'" sur",,),. r",(hose ofl~ring. Ihe I'PACA I'" =,(\il sen .... uim""l ~xclu,i"dy . 

win<ifulJ since "",ipicnl$ rec;,iw ~ "red" for wha, they wen: ln::ld doin~ It proI'id ... ",nually no 

inocnl''''' for 'IOn-ofrmni\ lirm. "'l"""hl5l! health '"suran,..,. Similarly, th~ SBA Offic~ of Advoc.oy 

n:p<J<1ed ,hal thecredil will primori ly !'>tnefi! "",all b" in~~ 11M Clun'nlly "rrl't insurnnce \Q ~ir 

emplo)ed. This windfall is tootr.Uy 10 lhe udveni>ed gool ori""enli~izjng mali busin..-s "00 do not 

e"!TWlly utTer h""lth in""r~ncc 'nd" >0. 

1'),.:100 yn" f...- hill<iin@, Ihi. W~)'S """ Me.n. (hemgl\l Sulx"",miu<)e hc:Iring an Sm31l1l,,~ine >s Ib>llh 

IMur:)nct a.~ Credit and penniuilli 'he opportllni,y 10 !lh3re NFIB R.,..,~reh fool>d:nion's5UNey 

"',uh~ em It.. IIlpic. 

SU'l9l1 

s:-~ ~er1 y 

Senio, Vi.::c I'residenl 

Publ'" Policy 

N.,.",,] I'Ncr:I1,,,,, " rll>!kpcll(knl ll .. i ..... 

'' ''~~ .. ''' ~ " .... 1IlO '~ '' _ .ttI.... _ ., .. ~<lo>. ... _. ~ ... "",_ 
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•• •• IiIiJili SMAll BUSINESS 

MAJORITY 

STATEMENT .'OR THE RECORD 

BEFORE HOUSE SUBCOMMITTEE ON OVERS IGHT OF THE COMMITIEE 

ON WAYS AND MEJ\NS 

ON 

SMALL BUSINESS IIEALTliINSURANCETA.X CREDIT CREATED OYTHE 

PATIENT PROTECI'ION AND AFfORDABLE CARE AC e 

NOVEMBER 15 , :'100 11 

JOHN AR.ENSMHYER 

FOUNDER AND CEO 

SMALL BUSINESS MAJORITY 

Thi~ testimoll", is $ubmitk-d in supplort of the small busineSli pcnlpective On the Patient 

Protection ami Affordable Care Act and. $1JCC.ifically. the unll3ct oflllesmall employer 

h~3Ithl'are tu crt'dit prO\'ision on small businesses, our nntion· ... l·hief job creators. 

Small Rusin~S$ Majority \sa national nonparti"..u smaJi buslnClioS adwx:acy organi7.a tion 

fuu",l~d and nul by sm~lI bnsim:ss uwner:; alld focw.....J nil l;Uivillll the bi~"'il prQb em~ 

facing small bnsin()Sscs today. We represent the 28 million '\ mericans whoare self· 

employed or own h"si ess~~ of up to 10<) emplf>Yees. Out (Jrgani1.a tilln uses sdentifie 

opinion nnd l'{:(momic r~scareh to nnden>tund and 1"C1)!'1)SClll thc inlert!sl~ of small 

busillC$SCS_ 

The Affordable Care A~t ..... ill help redllC(> theeost ofin~lIrllnee ~nd medical care whUe 

making coverage affordable. fair aml acceso;ible. The small business health car .. tax credit 

is an impOrtant provision ,,~thilllh~ al1 that wi\) help lu ..... erL'OS\,s fQr slllHIl emplll}"ers. 

Grdnled, he. a.~ "rWit i~ not a Il3llacc:, for high h~al h;nsurun<·"wsts. It alnne willnpt 

gin' ~ll small b\l~iI1IlMQwl1ers the relid they need. l-lowc''t!r, It i~ one wcap()n small 

busIness owners should Inclnde in their ar!ien~1 10 fighl c\'eNj.~illg premhlnl costs. 

Passage of the Affordablc Care"t! wa~ critical for sllJaU busillesse~; thcoy are ill dcsjMll<lte 

need of relief from the high l'O$Il; pf hellith insurance. Onr ~rrh ~hoW!; that .... (orming 

our broken hen1tbc~rc i)-,;tem has been and still is nueof sm.111 b"sjnes~ owners' top 

CPnccrns. and that the majority of small .. mpJoycrs bdicve I"('fOml is n<",lIed to Ii" Ihe US 

economy. It also shows tha I small busmessessul'pO" key pro\1sio05 in the la" .. 

~pecifil"'lll\)' ones thllt help them better afford Insurance. such as ta~ (f('<\it.s Ilnd 

insurance c~changes. Ilnd thnu that oontain costs. Controlling s~)'l"()("ke!illgoos s is 

cs..entiat tn ensuring Small businCSSl'S' abilil)' to obtain high·quality, affordable 

healthc~ru for themselves. 1h~ir families lInd their employees. Oor researcll alooshows 
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th~t nb~ot reform. these costs would continue to CSCllliltc. undemlining small 

busine,'<S~s' 5UC~S and our eL'(m(!mic " ,.,overy, Th .. nl!W law Yli!5 a long w~y towBrd 

fi Ki llg our broken s),l'tem nnd stemming these spiraling costs, while helping to create jobs 

and stimlll at,; th .. economy, 

Our res~arch. which is discuss.-.e.l in more d,;tall below. shows the impact this legislation 

and the tax ~redi t pruvision in tlarticular will h3\'e on small \msint'Slil!!o'. In July 2010, 

Small Business Majority partnered with Fmnilie!; USA to determine the number nf smoll 

busil1~ cligible for a tax nedit nu their 20iO tax I1'tUTUS, one of the key provisions of 

the Affnrdable Care Act. 

We found that mnre than 4 million small busiul'sseI! would be eligible to recejl'ea 

tax credit for the purchu ~ of employeE' henlth insurllnce in :!IIlO, ' 

We also commissinned ~ national sun~y of 619 small bu~iness owners to determine their 

\'iews on the tax .,re di L~ and in~uranL'" I!lCchangl'S. anothEr crucial prnvision of the 

AffordahleCare ,\el for small h\lsines~s. The SUT\'l')', which WtlS rcleaSt'd in J nnuary 

2011. fonnd that: 

Both the ta.~ cr~tli ts ~nd the c.~chang~s, on~e they tak!'. effect, make small 

busine~ uwners more likel)' to provide he!llthcal1' coverage to their employees; 

One·third of employers who dOIl't offer illsura"ce~aid they would be more likely 

to do so bet:ause of both the small bUSiness ta~ credits nnd the inSlimllt'l! 

e~cbange;;; 

31% of respondents who currt!otly offer il\snrance said the I:J.X ~ted it s and the 

exch,mges will make them more likely to continue providing c(wemge,' 

Ilowel'er, the poll also found that the lIast majority nf smnli busines~ owncl':'i dnn', know 

the tux e,.edits or nc/IO"9C1l r.risl to help them afford co\'cra.!;e, 

AS Cnngress hulds hearings critica l of the Arfordable earl' Act, it's Important to 

understand the ~"Qn$l!<luenus <IoioS nothing w()Uld have had on small businesSt!s and 

our frugile eroonmy, 

Small businesl>(!S wouldn't haw 54 billion ller year in helilthcare lax cn.odits 1111<1 

many small business protections; 

Small businesses would have no ability tn pool their buying PO"I'T th rough state 

insuronce e~cha nges, ~nd the vanous cost controls theACA pllts in plllee would 

not e,xist ; 

Tough enforcement ml'3Stlres in th ~ law, whkh are saving billions inl>kodic!ll'i! 

w~Ste. fraud and abuse, would alsn not exiSL This wOllld ft'sult in higher taxes for 

I'mployers and employres to fund Medicare, and high,'r taxl'.'l mean fewer jobs. 

, h,niti"" USA ~"d Smil ll tlu,in""" M~t) ." tldpin~ Ilund r"" Small U .... ; .... ",,..,.: Il~~tth IM"n.n"~ h~ 

C ..,uils, J ul} 10 I 0, h "1':""'"10 II h")il\<!$.R1lIjoriI~ .1Kt-'';''1att -bus;",,»· ...",.,art h ~.~ ... 'r, '<l~ ,"ltd) ,phI', 

' S"'"tll!",i"""," M.jo<il}'. Opiniom Sun"y: S",.1t t.I",;""". O"'""n( Vic .. " on """ t'ru,;, i""" "r,be 

P"t;cn' Pr(>\",i,," .nd Att'"d.blc Care Ac!. ion, ~, 20 t t. hIlI'JI>,,,,,lIbu>ino,,,,ma.j0<ity,o'I/lomaU·Iru, jn .. ,,,,· 

"",<oret, ,m.!!·m"incs,·l>\:oilhd","""",c') ,phI" 
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These i1rejust ~ome or the disastrous <:onscquences our healthcill'e system ~bsent the 

Affordabl<l Ca~ Act wowd ha,"" on smaU buSines$l's- con$equenCI!$ that a~ too s/lve~ 

on our nntiDn'~ pnmaT)' job cre~tors, Smnll busine.<lscs create 651'6 of Ilew johs In our 

country. Sp'cnding less on health in~uralJce will help them generate larger profits, which 

will help s~ our journ~' down the road to e(onomic reeoYery. 

This tl)StimullY highlights what we've 1~'1IT1Jed buth through our r<'6e:u'l:h abuut small 

business owners' opinions on thl' ta..:credits and the economic imp~ct the Affordnble 

Dire Act will have on ~nlall busines..es. The key issues are; 

l low the AffordableC~re Act is helping U business owners uow; 

Educate Small bnsinessownl!rs ~buut provisions such as the tax credits to help 

them thrive; 

e~It :ure l"O~t~ ~re the No. , prohlem fncillg ~maU hllsine~ses; aud 

Th~ statu5 quo was UJlal't:~pt~ble-,Joing nothing would thwart econom ic growth 

and job t:reation. 

~Iu w theAffurdableCftr e A<'Ils Helping 5 1111111 Busille~s Owners Now 

Our resl!!lL't: h shows thm sUlall husiness owners are more likely to provide insurauce to 

their elnployees because ofth~ t>lx credits and exc ~nge,; pTOIided through the new 

healthl"u'e 1&w. As menlioni'd in the introduction, our mOl>t rel'ent research incllld!!$:1 

national survey of619 small bnsiness OMl{,rS Ihal was released on ,Ian. 4, 20\ 1.1 We 

wanted t(l gauge how entrepreneurs vi~w two critil'llll"Omponeot); of the Affordable Care 

Act: ~ small busin .. ss tnxcre<Jits- a provision allowing busim;skS willi fllwcr than 25 

employees thnt ha,'e average i1nnual '"il1ges uuder $50,000 10 gel 01 lax credit of up 10 

35% of their hc~Jth iru;uralll't' costs Ot.'giIlJling in lax re~r :zoLo- anu h~allh insurance 

exchanges-online m~rketplaces where slllnll businesses lind individuals CIIn hand 

together to purchase ;Ilsurance starting iu 2014. "fhe survey's key lindings include: 

OM-third {33%) of employer.~ who don't offer heallh insurance said they would 

he lIlore likdy \0 do so ~ause oflhe small busioe511 tax credits; 

31% of reslX1nd~nts-indudin,l! 40% of busille~se~ with 3-9 employees- wh() 

cUTn!ntly offer insurance s~id the la( crediu;- iIl milke them more 1i~cl.v to 

l"Qn tinue providing insurauct': 

Oue-third {33\l6) of respondents who currently do not offer Insurance said the 

excbange w(\ul(lloake th .. m l\lo ~ lihl.v to do ~u; 

TIle same is Irlle {or thOl>c who already \Iff~r illsur:m~, will, 31% rllSpondin,l! that 

the exchange would make them more Ii~ely tu do so; 

"owever, 1II0si r~spondellt s are nol {~,milillr wilh the exchange ur the 

lux credits: (lnly :11% (If rcslJOllftcnts IU"il fU'llili'lr with the exchlln!;c 

and 43% are (a",ilia r with the tax credit.s. 

"Sm.llllusill"'" M'jo:rity, Or'nloo S",,"¢)': S",~IIII";r",,,, ! 0" no"" Vi<,, ! 011 1-:0) Pro, iJions of Iho 

l'auC1I' Pml,",""" -and ArT<>r<t.blet...,., A",. Jon ~IH I, hllp """llbu~in"' "'~j<>ri')'_<'T~ "","II.bu>'",-_ 

r<:;.<:""'M!m.II.h!t<I"""'.h .. II""."'.slJrl'")',r h ..... 

, 
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To help inlorm smull bnSincss ownl'fS abant thc tn credits and other provisions in the 

law thHt a(f~ ... t them, Small 8usint>S!j Majority h,,~ bm"! hQlding List",ni!lg Tonrs, 

webinnrs "nd oth~r c"cnts ~c ()!;.S the nUlion. Through onr conversations with small 

business owners ~t theseevl'uts, we've fOl1nd anec<lotlllly exactly what our scientific 

opinioll rescarch foulld; the vast majorilyof small busillllSS owners don't realile the ta~ 

", e(lit~ exi~1 to he lp th",)n better ~fford insura!lw, bUI when thl.')' leam about tb!!)ll th~y 

like " 'hnl they hear und wanl to know more. 

We recl'ntly sJ>oke with a small business owner in San Francil;l'O, CA, who had never 

heard orlhe las credits nntil we informed her of them. She was vcry intrigued by the rn 

und upset her CPA ha<ln'l tol<.l her ~boUl them when Ih/'Y fill!d her taxes. She r«ently 

had to drop health Insurance for her emplo.'"~cs, and if she had knnwn she mighl be able 

to get alax credit through the new law, it coul<l hav~ helped her continue prol'idillg 

inS!lrance, Sh('. pla n" ".) on talking tu her accountant ;,oout the tax cn.>dit immediately to 

see if she might be able to reitl~tate her employt't'S' polid .. s. 

We believe th:11 otlce small business owners oo:ome more familiar with the new law and 

specific rovi~ (Jns like the .~mpll business tax credits, Ihl'Y will understand the financial 

bt'nefits and COSt s.wings it prm·ides. In faL1, a "aiser Family Foundation study 

oonduct".) in Jllnllary 20m found that although the public WIIS divided overall about 

reform, Ib~' became more supportive when tol<l about key provisiotls. Afler h~aring tliat 

tll;!! credits would be availablt to help small businej;scs provide co"crage to employees, 

73% said it iliad,' tbem more supportil'e, and 63% felt Ibal way after learning Ihat pcople 

coold no Irmger he denied covernge hl'Cil\l1i\! of pl"t.~xis ti ng conditions.' 

The huge number of small businesses eligible for a credit on their 2010 ta~ returns shows 

ho"; wide-mnging the bendits oftheACA are: Small Busine;;s Majority and FmniLie$ 

USA's study on the number of small bnsinesscs eligIble for a lax crl"<lit on their 2010 tax 

retorns shows Ihal more h~n .. million small bUSi11~l\SeS ~re eligible.- That equ~ es to 

83.7'Jb of all small businessej; in the country. Perhaps even more encouraging is thai 

mort! than 90% of sma!l bU$inesStlS in I L stales are eligible to I"t'('eive the ta ~ crt-dits, with 

lleaTly \ ,2 million .~nlllll businesses nationally eligihle to r~ei,'e thp masimllill credit, 

While th(! illitia! uptake on the credits was luI'.', this i~ la'1l.ely due In small busine;s 

owners' overall unf~rniHarity with this provision of the Affordable Care Al"1. What's more, 

oppont'nts hal'espent tremendous lime ~nd resou rces di&OOlIraging small business 

owners from taking the",ret\il!; fQr political purposes, which essentially 3111000\5 to \.hem 

discouraging small busine~ owners from taking free money, Whether iI's a couple 

hundred dollars or thousands, any extra monc), helps during this unforgiving ecoLiomic 

dinmle, We shonld be doing all we can to l-dno::nte small busine;sOWnl'TS alxmt this 

Ilrol'ision ~nd ~n~"Q r:lg~ them 10 apply for it , It's HIS\> eUl'Quraging til., IRS i~ taking steps 

to ~implify the crodit for snm!1 employers so more firms can ~ap ils ben~fits, 

• Kaiser famity !'<>U/Id;I1i<lQ. "m",.;caJT, Am [}" 'id,'<I t>o ~' U"" tlh Itcf\orm t'r(\fI< ""' t~ C}I "",II. llUI Ih~ 

I'ul>tk, tn<:iudi'\g C,," "". tk'c"m"" Mo,"" SUl'P"n;l ~ When T<>td ;\11<>'" K'1' Pro";',i",,,,, I.", "!2, 2010. 

hlll' il \\'w" kJT.org. i><:l"f'<ltl ,J k"i""'l'<'II.ol J tll.r.d", . 

• f"M,jij,,)" USA . nd S,n.lIlh.,io&!' M'j'''il),A tklpu.II Jt.,!<l fDl' ~m~1I Hul in..,;.,;: It .. llh tn uf"l ''' ru: 

l"r~i"" jul) lilt 0, hlll'" ·""",ltbuj ,"",,,m"j<lti!) .<lrl!'. "'"II.bu>iU ....... "'"'~d""h l .. ,.<f'<'<Iil ... ,utly ~hp.. 
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Educate Snul il Bus inesses nhoullhe Lllw lu Hell' them Thri,'c 

Crilics (lflhe ne .... lnw hOI'" wasted no time iJl ~tteillptillg IIJ leur it dOWJl, yet have offered 

nO pragmatic S01utiOII~ On how to addres~ the ~'Ore problt'.lll-Ihe ex~es~ive l'QSl ofheallh 

il surnn~e, As mentioned above, they've al!<O 5pCJlt considel"llble limeatl3Cking Ihe tax 

credits. The re!:'eJll rcle-ase of data showing how mallY small t'.uployers received the tux 

credit should hell w.lke-"p CIIll for el"O!I)'one ill\~sted iJl ~m;ln husinesses and our 

eCtHlomy, Smail busiJle5S owners lire IlIc backoone ofth ~ ~"OUJltry_ They will help pun Ihe 

economy out of ils Sh.lI11p. aut they can'l do it withuut h~Jp. All sl~"eholders shuuld be 

educllting small businesses aoout provisions Ihal will PUI ""oney bllck in Iheir pockets 

now, whkh will help them gro .... their busineSS(!!; UJld .... ith it the economy. Th" small 

businl'\<S lal< credit is olle oflhow pruVi~ions. 

Thank~ 10 the lax credits, small businesses received S278 million Mek on their health 

insurance premiums Ihis year. Qne of those small business owners is Mark J-looesh. 

owner of Downtown HOllie & Garden in Ann Arbor. Michigan. For Mark. 2ULO was II 

gQOd year. l'lis best evl'r, in facl. Mark saw his bnsiness bluswm, was able to offer health 

insnrance 10 his 12 fnn·time employees and even managed 10 grow by mlding fi person to 

his stafr. 

Whilebu5incss 6avvy IIndnubtedly cnnlriuutcd 10 Ilis bustling shop's bollom line, it was 

Ihe small busint'ss I....: credits Ihal allowed him to hire another person. Mark. who pays 

75% (If his employees' h"althc~rc premium$-SbO,rH',lo a year-was able to claim S15,0(1) 

on his tax relum this renr. Knowing thaI Illoney wns coming back ga"e ark. who had 

been on Ihe fpnC<1 abollt hiring another perSOJl. Ihe cOJllidcnce he needed 10 make hi .. 

mQ\·e. l1is nl'w cmployt'l!: has ~me a lremendous asset to thes\()1"\' ~Ild a big part of its 

sllet'~S to 2010. Wh"I's nlOTt!, his new wurker was unemployed before I;olog 10 work for 

Mark. Now sh~'~ paying ta.~es and contributing to improving the economy. 

'-Icrolthcare Co sls a re the NO.1 Problem Facill1; Small Businesses 

National surveys of small business owners consistently show that the COS! ofheahh 

insur~Jlce is OJle of their bigseslllverall problems, Smull business~ are ~t a disadVllnt~ge 

in the m(\rket]llal~ largely because their slnall omnbers make rutes higher. Al .... 'Urt!ing to 

research .~\lpPOI100 by theCommon .... ealth Fund, on average they pill' 18% more than big 

businesses for coverage .• Small busilll'SSCS, iJlcluding the self-employed, need a !en~l 

playing r.e1d to SUCC1!ed and con inuea~ thejoo generJUOI"S for the U.S. eoonomy. 

We htar storie;; e"I~I)' d~y frOIll small busines.-; owners who cun't get oove~e because 

they'l'e been sick in the past or the health ]lJ~ns Ihey ~rt' offered areoutrageo"sl~' priced. 

Many other businllS-~es maintain CQvera!;e for employ~e:s, but the cost is taking 11 bigser 

and biUet chunk outof the.ir operating bu<lgets. ]1'5 common to hear aoout double-digit 

premium ;lIcl"easel\ each year, ealin!; intu profits ~1ll1 $(.1ll1etill1l!l\ rvrdnl( slaff reductivns. 

This is ",h .. r!! the small business tax credits cal) pro,ide ~me .... lief. If every $mall 

busine$S owner eligible for a credit applit!d for it. it t()uJd help lower a significant number 

• J 0 • .,<:1« al. G<:n""",it:- and Adju'l<"(! P"",i"m. io J"b-n~ 1",ul1l/l~'; 11.".ii i. Up. W)oming i. 

\)i)"n. llealli,,4ffm . MlI)'iJ" .... ~006. h"~ ~ ... : .. nltfll,t..:~)(I'art.i"'.,.-w""""'n(/25 RJ~ filll. 

, 
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of employers' costs-cvcn if it'Sju5t by" couple hundred dollars. 1\5 1\ small busim:ss 

,)wnet m)'Self, ! know ~ery litt!e bit counts for sma!! finns. 

We know small business owners want tn offer health covcrage. and our surveys show 

that most of them feel they hJve a respolisibility to do so. Tht')· nl'Cd to know about any 

provision a''Il.i!ab!e to help them do so. Small Business Majority conducted surveys of 

small business owners in 17 states m,twe-en D~{"t!mber :lOOS and August ~Q09. 0ur key 

findings ineluded: 

An awrageof 67% of respondenlssaid reforming healthcllTe was urgently net'"ded 

tn fix the U.S. ecnnomy; 

An a"erage of86% "f small busin~ owne ~ who doo·t offer health coverage to 

their employees said they can't afford 10 prolid .. it, and an average of(.l'i6 of 

those whll do offer il said they are stru~l in g to afford il. 

II shou ld be noted thai respondents to Ihese surveys included an a"erage oflS')6 more 

Republicaos (39%) than Democrats (24%). whi1 0:l2796 identified as indepo:ndent. 

The exorbitant ("OSI oFinsuranre me~ns th~t Illan)' Sillall bu~il)e5SC!> are fofl!l.-u tu drup 

(overage nltogether. Acrording 10 the \{aiSl!r Family Foundation. 54% of businesses with 

fewer than J{) employees don't offer insuranct'.~ 

Thio; mnkes sm~JI business elllllio),ees 8 significant LlOrtion of the uninsured population. 

Of the 45 million AmeriCllns without health insnrance in 2007, nearly 23 million were 

small husiness owners, employees or Iheir dependents. 3clCtmhnl\ to Emp\o)'ee Benefil 

Research Institute estimates." And nearly one-third of the uninsured- 13 lIIil1ion 

penple- are employet:.~ of firms with les. than 10(1 workers. H' 

With staffs of 5. 10 or even 2(1 people, small bUSitlC$SCS are tight-knit urgani7.atiol"i$. 

Own..,rs know lheir i1mpLO)'ees w~lt and dCpElnll un each mploy~", for their busint!SSCS' 

suceelis. The)' dnn't want to see their valuable entployees wip!.>d nut fiounciaUy by a 

e~lth problem. or ignore illnesses beeRlise they can't afford to go 10 Ihedoelor. 

TIle Affordable Care Act ~ddresses all Ihese issues ami mort'. WiUlOut reform. we will 

illllJedeuur oVi1raH economic grnwth. SmaJi bU5itl~es wilh few~r than 100 employees 

employ 42')6 f>f American workers." Traditionally. small businesses lend the l"lly 011\ of 

rewssiolls. Continuing to address the heulthcare crisis by implementing the Affordable 

Care l\~t and educating ou r primary job creators aboul provisions thalenn help them is 

essential to our I'itality as a nation. Trying to tear down or intenlionally obfuscate 

, Sm.1I u",;""" M.j.><;'} . .';IOI. s",,"}, H;g!llit htSmall !I"sin.", S"PI'<lf1 r, ... Hnllh<a,~ I{d"n".Au~,," 

l00'J. hl1P ~f "" '" .!Im.tJbu,;ncso""liiml) ~;.m.ll.hu>i",,,,s,,,,,,,,,,o"'h (>rini',n.n:S<"~"'h.php. 

, ".j".". "om,!) FOIInd.,iilnll I RET. [nlp-\b)· • .,. t ICAllh tk""r.,. Annuol '>",,"y. 1008. 

h II p:llchl>,; .ktT or !'l1 00~. him I. 

" I:n'plolc<:.Ikncfir R .. "" .. h IM-ri!ul •. S-oklTCl.-S ofH<alrh tn, ,,",""<ood Chara<M'i>lI", oflht linin . .. .....:!: 

An~I).,s of 1ft" M4J"<h 101'8 ell""",r Papulati"". 

h II p:lI,. .. ,. cl>ri o~pub 1I"III""oIlb, ~ "dc,."r m'l f,- ihl )j >p& "'nl""I_ "t ='3 7j. 

'. Con'er f"""nwrioa" l'n,gR.·",. Wttal Will !t.ppo:n 10 Small U",;, ...,.. if tI.,llh C.,., H Rcpcal<>.l. ),,1) 3. 

2(11(l. htlp;!" '"'' .• m.';" nrrogre..; .(Jr~i; I"'..r-O I UJj)7/.m.lI_ bi.<_« R, .. m.hlml. 

" U.S. f\"f\"IlU "rc,~ .. " •. 2(\1}/> C,,"nl} UII.;""". I"<lI< ..... 

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important pr(wisions ofthi5legisl~ ioll would .rend sllHlli hIlS;I\CSSCS b~ck into in II 

l;Iroken system th~t th eHte ll ~ th6r ~'O l,.,titi~·c nI'SIi, tii$<..Vun\gescntre,Jrcncurism and 

jt'Opardize!O our ee<lIHlmic r«O\'cry, 

Conclusion 

Healthcare refonn is not an idt'Ological iSl!ue; it's an e<:onomic one. Small hlUliness 

owne!'s know this, which is why Ihel' owrwhelmin)(ly support reforming 0111' hrok~1I 

system a nd w ntaining th .. s~kcling cOSt Qf insllran('C. 

Without refonns like Ihe lax CIl'dils in the ACA, small busines~ will onoo ag.'lin h,-

mired in a system that drains their t'Offers and slulll$ their growth- disabling them from 

playing their vitali." important rule ~s the II ntion'sjobs creators. Blil it's iml>erative they 

are eduCl1led about the provisions that "ill hel p lowe r their costs so they call in 111m 

grow theeronomy. We hope Congl'eSli will spend its time focusing on wa)l$ 10 make 

implementa.tion of the Affordablt Care At1l1S smO<)th as possible, and on ways of 

strengthening ilS prO\'isions, Our smtlll bllsiuess.:s and our econom ic ri.>CO\'t'ry depend on 

it. 

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Curl1l11tnts (ur the Reeurd 

HOnst COll1mitfl'e on WlI, S lind Means 

SUIxIlIIlIIl;IIl'e UII Oversight 

1~~lIrin g: $ nhlll Bu in u~ I~elllih Insnnlnce TaJ: C redil 

Nowmocr 15.2011. 10;30 AM 

b) Michllcl G. llindn.:r 

Inc Cen!.:r t\>r fi"",,( Equity 

Chairnmn l)ou5lan)' and Ranking Member Lewis. thank you for the opportunity 10 submit 

my COIllmcnts nnlhls topic. We will Ical'e reporrin!; on Ihe drects oflhiS program to thc 

Administrl11iun witnesses and II ill confine our IcstimoJlY II> alternative Will'S to Ihm snlal1 

busiJlesscs may otkr health care morc dlc.:tivciy in the futurc, although we .... ill first 

oll;:,r our Ilsscssment "fthe PQ~sibil ill es of relilrm under thi.' tI}fwJuMc C,m, anJ Pulienl 

f'rf)ICClitln Act. 

The A!l\>rUubk Can: Aet work:; toward increasing funds lor 1I."cdieuid providen. which is 

nec~s.af)' to gL'I IX'oplc OUI I>r t'mcrgene~ rooms. 1'lC :;arne act. hOI,,'\·cr. counleJ on 

Its,l1ming: Iha\ Mcdicun: prlwider ClltS 1I'0uid be implemented - a heroic :Issumptil>n - in 

order 10 pass acc()rdi~ tll budget ntks. No\\ that the Act is pas'l""d. h(')\\,."ve<, the. tiction 

thnt currcnllaw II ill be maintained can be diSjlCnsed II ith. Parity bctllten Me(l!C:lr~ Md 

Mcdicbid is dcsirJl>le, ~l1hough '"' ithout ,nundalory sick leave, it will nol kt'~]l]X\l1f 

pI.""Opll"" from having to usc L'mergcncy mom l·are. limiting Ihl.' likely efli."Cti\,l""ncs~ ofl11l."" 

Act fonhc purpos<= ot' decreasing costS llLld I..cq,lng pr~miu11l~ loll' lor small businc.~. 

Mnrl.' dallgl'l'Ous w the SUCl""I.'SS of the ACI, hOWCVl,., i~!lll' PQssibility <)rlhc flliluru of 

privati: insurance get1(:rally. The kef bsue lOr the ruture ufhcaltll care OO'boli(lmi(>rt is 

the impact "fpre-existing condition reforms on Ihe m3r~Cl for he~llh insumncc. 

Mandatcs ul1dl.'r Ihl"" AfTordahll"" Can.' I\et (ACA) may bI' inadl""quate l() kttp (lC"{lple from 

dropping. insuranc~ - an,1 will ~ertainly nOl II Or\( if th~ mund;1(e is rejCCkd ulto}!:cther lor 

I:Ullilitulional 1"\,:,)Sons. 

trpcopje ~I art JroPflillg Insurance until they g~1 sick - whi~h is ratiOnal gJwn the 

IIcakness of mandates - then priV!!IC health insurance. will rL"lluirc a bailout into an 

errccli~l"" single payer 5}'stl""tn. The only 11'&) 10 SlOp this rr'um hJPpenillf; is to CII~Cl a 

subsl()i.wd public option ror Ihl>se with I'rc-e.'\iStlng condilions whik repcolin)t m~H()mCs 

und pre-exisling condition refort"'. 
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OllC oplion is sillglc-p..1ycr c(llaslrophic iosunmcc \I ilh hcullilli~ving:s acc~'>UnIS. This 

wQulll 11(11 ,,'ork as allveniscd, ali hc~hh care is nOI n normal good. PC()ple will oblain 

heahh ~ar.: uro" doctor recllnl1n~~\lll!I'nll;;, rcgarlllcss I!flheir abilily 10 pa) , Provillers 

"iii the" shoulller Ihe burllen of\loilin);. ror heullh savin!,'S account baklllcc,s III 

accumulate - further cneouraging prol'ider consolidalklll, i:xisling trenll, 10\\ at'! 

provider cnnSQlidaliun \\,11 C)(3ccrbate th<.'Sc prublcms, rnx:!use plllicnlS will lacl.: oplion$ 

once Ihc~ arc in u n~t"o"". giv!OK lun<Jers lillie oplion ulher Ihan p;l~ ing up as deman<Jed, 

Shining In more public li111ding ufhc;lhh eur~ in response 10 future cllcnts is IlCilllcr good 

nor bad, Rather. lh" succt;.'iS ufsuch fund,ng dC(l'l'nds UpOIl its adClIUaC) ~nd il~ impad 

on Ih~ qualilY of care - II ilh in~dequ3le Funding ulld qu~litl' being relilled, ror ~ump!c, 

/Tokdil'are provide'r CUIS Undl'f current law hal'c been suspended 1\lr over a dcead~. Iha 

conS"eqll~nce ur\lhich is ~dcqllolc care, lIy \lay I)rC"lnparisoll. Mcdicuid provi<Jer CII ~ 

h~I c bc<!n stricII~ enforced, "hieh hlls caused I11Mt I't(lviders \0 no longer ~~'<! Mcdic~ill 

palienl.~. driving lhel11 10 Il(Ispilal emergency rooms and Ir...'!: clinics wilh long wailing 

pcrloos 10 gel car~, 

l illimall'ly, liKing: Iwalth car,' rcfoml "ill require more fimding, pt\lbably iiQllIe kind of 

employe'!" I'~yrv!l or ncl bll~ ill ~s receipts ta ~ - which would also limd Ihe shQrtfal1 in 

Medicare und Medicaid (~"d t:J.ke o,'er mn~1 of their puhlic rel'enue funding). We \\ ill 

now mOllc 10 an allalysis of fUlidillg oplions and their irnp:lcl on palicllll':lTC and CO~I 

conlrol. 

111<: commincc weI! ulI<Jcrsl3nds Ihe ins all<J OUIS ofillerca~illg Ihe p~yro tlt3~ . so I wil! 

confine my remarks 10 a fuller c;>;rlanaliol1 orNcllIu$i,lcSS Rcccipl.$Taxc$ fNBRT). Ih 

b:ue is sinlilar 10 a Value Added Tax IVAT), 11111 nol identical, 

IJnlikea VA I. nil NBRT 'loulll nol be visible nn n,.'Ceipl~ and should 1101 bczcro mica al 

Ihe burder - nor should il hi! applied 111 imports, While both colh:cl fmm eOllSumcrs. Ihe 

Ullil of :Hl:l l~ sis for Ihe NBRT should b<' Ihl.' bll~inl.'ss 11I1her th~n Ihl' tl1lllS11Ctioll, As such, 

il.~ applic311011 should Iw llni"ersal - efll'crinB; both public cnnlprullc$ I\-ho eltrTemly file 

business inc,)m" tMl'S ano.J privale compJnics I~I)(\ currently file thcir bU.,incss cspcnses 

on individual rClum~, 

-[llc k(.-y dill'crenee bcl\'e~n Ihe (WI! tasl'S;s that the NBRT should be lhe vchicle iilf 

distriboling HIS bcnclils for familil.'), particularly Ihe Child T:t~ Cn:dil, the o.:pcndenl 

Care Credit lind Ihe IIc:ahh Insurnnee Exclu~ion, ns lIell (IS lUIy rc:ccnll~ enacled credit;; or 

~nhsidk'S ulldcr the ACA, In the l.'\cl1l till' A.CA is n,.'funntd,llny lldditi(ln~1 subsidies Of 

luxcs should be lakcn llgaillsl lhis 111-' (10 lla~ for II public option or provide fur 

,:lllaSlrophic care and I kulrh Sal'ing~ AccounlS and/or Flexible Spending; AccounlS), 

'Illis option wQuld be paniculnrly llllractive 10 small businesseS, It "oold e.>~enliany 

bronllcn the lax credit in th .. ACII, The current lax t~l!-ime d('loCS nOI sene 10 encour:lgc 

usc of Ihe Small Businc .• s T:LX Credit. whidl in ~ny casc Sh\IUld he mcrged wilh Ih~ 

heallh insur:lncc exclusion as p3n llf all NBRT collected 011 311 businesses. regardless of 

filing WilliS, 
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The k .. -y to (11iIj~:lt o[l is 10 increasc the ~ rate enough to eneOlll"3,ge 1,1';;:' and riXJuiring 

such IlIX bcnciits for health care and Ollr proposed expanded and refund3ble Child Ta.\ 

Credil hefon: ~n) olher exclusion ~n: taken. including (lny I.el\l rmin>; or ~p()ns (which 

is" hy zero ruling is nOI re~om!"ended for Ihis WX). 

rhe NBRT ~an pr(l~idc (If} inecmi~e lor COSI savings irlle (11\(1\1' ell1ploycrs 1(1 olli:r 

ser,,!e;;."; prjl'mely (0 bOlh employed and retirees in e}(chunge lor a substamia] tax benefi t, 

cilher by pro"iding insurance or hirin!; heal1h eare "ork .. rs direclly aod building Ih~ir 

own facilities, although we expcctlhat oilly larger husinesses will go In tll1l5C tcngths. 

Ell1plu)ers II ho rund ca(II;;lrophk C,lre (lr opcmtc nUl1iin!; care f.1cilities "uuld gel all 

even higher benefit. ",ith the proviso Ihat anyeare '" provided be superior to the care 

ul'ailabil' through Medicaid, M:tking cll1plo)e,> rl'Sj)Onsibic Ibr most costs and lor all ellsl 

s,lvings alto"s Ihem to usc >ome market iJU"er tu gctlowcf ra!C"S. bUI noS(') nl~h that (he 

free market is deslroyed. 

This propo~1 is plllbnbly the most pronli~ing. W3Y 10 3m:.s1 health care COSl.'! ii"om thcir 

(;urrent upll'ard spiml a~ empio) ers II 110 would be tinanciall~ responsible for Ihis rc 

through la~~s wuultl ha~e a r;:~! il1(;cnt;vc hI limit ~pcndil1g in a way (hat indh' idual 

\a~payel1i simply du not hav.: thc me~n s ur inccntive to c.\efCis~. While 1101 all enlplO)eTs 

would panicipme, Ihos« who uo lIould drmnmielllly 111ter the market. In ,tddition, n kind 

ofbcllctici:uy ~chimgc could ht.: estah1i.~hcd Sll thm panicirXlling employers might tr:tdc 

credits for Ihe funding. of lormcr emplo)ecs who retired dSCllhcre. so th~t no one mu~t 

pay unduly for thc medica! eosts of"orkcl"!'; Ilho ~pcnt the m:ljoril)' uftllcir curecl"!'; in the 

:iCl"'<kc of other employers. 

The NBHT ,,(luld replace disability insurance, h(),pital insur:U1ee, Ihc cnrponlle income 

tax. business ine{)\nc tnxati()O Ihwugh the personal income ta~ antlthe mid range 01" 

personal income ta~ (;uliectiol\. efli:clil'e~ lowering personal income luxcs by 25'11 in 

1l10~t bmckets. 

NOW that i:olkdi()fl orlh,s lil. ... would kl'ld 10 a rtduclioo of gross wages, but (lO\ 

neccssurily nL'! \llIges - although larger fnlllilil'S would receive a large wage bump. while 

w~althier !;ul1i1ies ~Ild childless families lI'<)ultllih'ly receive a Stmlellhatl(l\lcr 11<:t W:lgC 

due to los5 orS<)n1C ta ~ subsidies nd becaose rL-duclions in incume I.) mnke up lor ~n 

ller~a.~ed lax benefit for fal11ilie~ II ill likely be ~kewcd It) higher incomes. f.'or thi. 

reaSllll, a higher minimulll wag" is necCSSlll)' 50 thatll1wer wag<.l wuti;crs arc 

COmpensaled II ilh more thanju~llh;:ir child t,t ... benefits. 

J"he Center calctlllttes an NRR r ral,' oj" 27% bciilrc I1fTSl'tS for the Child Tax ("redit anu 

Hca)lh InSlimnee E:l.chlsion, or JJ'h. af\er Ihc C,\clIlSiullS arc includ ... d. rhi~ is u '"b"luncL.,j 

budget'" rotc. It could be SCt lower irthe spending eate~oril!S funded rc~eil C a 5upplemelll 

Ifutn illeollle ta~L'S. 

"'J"htlllk YOll for the npponunity to address the.eonunittce. We 11ft', of e.)uT$C. Dvnilal-olc lor 

dirCClleslimuny nr 10 :lnSllcr questions by mCl1tllt:rs (lIld -,talf. 
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