The Internal Revenue Service has issued new guidance on the recently passed health care reform bill to clarify that small businesses receiving state health care tax credits can still qualify for the full federal health care tax credit, and they can receive the health care tax credit not only for regular health insurance but also for add-on dental and vision coverage.

Notice 2010-44 provides detailed guidelines, illustrated by more than a dozen examples, to help small employers determine whether they qualify for the credit and to estimate the amount of the credit. The notice also requests public comment on issues that should be addressed in future guidance.

Responding to a number of taxpayer questions about the interaction of the credit with state-level health care tax credits and subsidies, the IRS guidance provides that the new tax credit will not be reduced by a state health care tax credit or subsidy, except in limited circumstances to prevent abuse of the credit.

In particular, an employer that receives such a state tax credit or subsidy will also receive the full federal credit based on its entire contribution so long as the federal credit does not exceed the employer’s net contribution. Approximately 20 states offer these benefits.

The guidance clarifies that small businesses can receive the credit not only for traditional health insurance coverage but also for add-on dental, vision, and other limited-scope coverage. The employer must meet the requirements for limited-scope coverage that are similar to those that apply for single coverage: The employer must offer to pay at least 50 percent of the premium.

“Small businesses face unique challenges to providing health insurance for their employees, including higher costs and fewer choices,” said Treasury Secretary Timothy Geithner in a statement. “The small-business health care tax credit in the Affordable Care Act provides an important incentive to help small businesses overcome these challenges and cover the cost of health insurance for the hardworking Americans they employ.”

The Affordable Care Act, which was approved by Congress in March and signed into law by President Obama, included the small-business health care tax credit, which took effect this year. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

However, many small businesses are wary of the health care reform bill. On Friday, one of the largest lobbying groups for small businesses, the National Federation of Independent Business, said it was joining a lawsuit by 20 state attorneys general and governors filed against the health care insurance mandate.


In general, the federal health care tax credit credit is available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small-business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.

The maximum credit goes to smaller employers — those with 10 or fewer full-time equivalent employees — paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide further information on how to claim the credit.

Because the tax credit’s matching rate is highest for employers with 10 or fewer full-time equivalent employees, the number of hours worked is an important factor in calculating the credit. The new guidance allows employers to choose among three different methods of determining hours to minimize their bookkeeping duties while receiving the maximum tax credit for which they are eligible. Employers can look at actual hours of service, or can use simple rules of convenience to estimate hours based on total days or weeks of service.

Because the tax credit is effective for 2010 but was not enacted until March 23, some small businesses that are providing health insurance in 2010 may not meet all the requirements for a qualifying health insurance offer. To ensure that these businesses benefit from the credit, the Obama administration is providing special transition relief for tax year 2010. The transition rules simplify the requirements for what constitutes a qualifying health insurance offer while maintaining the core requirement that an employer make a significant contribution to the employee’s coverage.

For more information, visit the Affordable Care Act page on IRS.gov.

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