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IRS Releases 'Guidance' Document on Health Coverage Tax Credit

By John Reichard, CQ HealthBeat Editor

May 17, 2010 -- Subsidies provided by some 20 states to help small businesses pay for health care won't reduce the size of the tax credit available under the health care overhaul law to certain small businesses to cover their workers, federal officials said in a press briefing Monday morning.

Michael Mundaca, the assistant secretary for tax policy at the U.S. Treasury Department, added that under his agency's interpretation of the overhaul law, the credit also applies to dental and vision coverage.

Officials estimated that some 4 million small businesses can qualify for the credit, which pays 35 percent of premium costs incurred in 2010 for those eligible. To take advantage of the credit, businesses would claim it on the tax returns they file in 2011. But it might provide some relief before then to the extent that it reduces the quarterly estimated tax payments businesses pay during 2010, said Mundaca.

Mundaca said the federal government does not have an estimate of how many businesses will take up the tax credit. He said that not all of the 4 million provide health care now. To the extent they do not, the credit could lead some eligible businesses to begin offering coverage, he added.

The credit is available to businesses with fewer than 25 full-time employees whose average salaries are below $50,000 per year. The business must pay at least 50 percent of coverage costs.

But employers count up the total number of employee hours worked to determine eligibility. That approach allows the credit to be used for part-time workers. Thus two half-time workers would count as one full-time worker, for example.

"Because the tax credit's matching rate is highest for employers with 10 or fewer full-time equivalent employees (FTEs), the number of hours worked is an important factor in calculating the credit," a Treasury fact sheet on the guidance notes. "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," the fact sheet adds.

"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," it adds.

"The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers," the fact sheet notes.

The guidance also is relaxing a requirement that employers provide the same level of assistance to employees with their health coverage costs. For the time being, businesses will still be able to qualify for the credit even if that assistance is not the same for all employees.

The Congressional Budget Office says the credit will save small businesses $40 billion by 2019, the fact sheet added. The credit is available in 2010, 2011, 2012, and 2013. In 2014 and 2015 it rises to 50 percent of coverage costs if employers buy coverage through exchanges. It is no longer available after 2015.

Mark Pauly, a professor of health care management at the Wharton School at the University of Pennsylvania, said many small businesses don't see the value of offering health insurance to low-wage workers and need a major inducement to do so. A tax credit may not be enough. "If I had to bet, I don't think the takeup will be particularly high," he said.

The National Independent Federation of Business (NFIB), which last week joined a lawsuit filed by a number of states challenging the constitutionality of individual mandate provisions in the overhaul law, has little good to say about the tax credit.

"Often cited as the cure-all for small businesses, the small business tax credit will do little to nothing to make purchasing insurance more affordable for small firms," NFIB says on its web site. "A tax credit that is poorly structured is not going to provide sustainable and long-term relief from high health care costs."

It adds that "very few small businesses will actually qualify," citing CBO figures to assert that "just 12 percent of the small business population would benefit in any way." And determining the actual amount of the credit "puts small business owners through a series of complicated" tests, it said.

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