State subsidies won't reduce the federal credit, the IRS says.
About 20 states offer tax credits or subsidies to small firms to provide insurance. Payments by the state to the employer or to the insurance company are counted as a payment by the employer for calculating whether the employer pays at least 50% of the premium, a prerequisite for the federal credit. The only exception to this rule is that the credit the employer gets can't exceed what it actually pays for insurance. The maximum credit is 35% of the health plan's cost or the average group premium for small firms in the employer's state, whichever is lower. The full credit is available to firms with 10 or fewer full-time workers on the payroll and average yearly wages of less than $25,000. The break phases out for larger firms and is not available to companies with 25 or more employees o average annual wages of $50,000.
The credit also applies for dental, vision, and other limited coverage plans. It is not limited to standard medical coverage, according to IRS. For the full details on these and other rules relating to the health coverage credit, see Notice 2010-44.