About 78,000 of Minnesota's smallest employers should be eligible for a tax credit this year to help them buy health insurance as part of the federal health reform bill, a new study has found.

These employers would qualify for a tax credit of up to 35 percent of health care costs starting in 2010, according to a report released Wednesday by Families USA, a Washington, D.C.-based advocacy group that calculated the potential impact for small businesses in each state.

"Many small businesses -- like the local diner, the hardware store down the street, or the neighborhood repair shop -- face special challenges in providing health coverage for their small number of employees," said Ron Pollack, executive director of Families USA. "They will now receive substantial help."

Small businesses typically pay more per worker for health insurance, if they offer benefits at all.

The 77,900 Minnesota small businesses are among about 1.2 million nationally eligible for the credit, according to the report. To qualify, these businesses must employ no more than 25 employees, have average annual wages of less than $50,000 and contribute more than 50 percent of health premiums.

The full tax credit of 35 percent is available to employers with no more than 10 employees and average wage of less than $25,000. In Minnesota, 22,800 employers qualify for that maximum credit.

Smallest employers gain

The tax credit for small businesses is just one part of President Obama's sprawling health reform bill, which aims to bring around 32 million into the insured population.

Among other things, it requires individuals to carry health insurance starting in 2014, with subsidies for those who can't afford it. It also requires employers with 50 or more employees to offer coverage or pay an assessment, a provision that has upset employers around that size.

Employers with 25 workers or fewer, though, are clear winners. Not only are they not required by law to offer coverage, but if they do, they get a tax credit. The credit of up to 35 percent starting this year jumps to up to 50 percent in 2014.

The law allows employers to count two half-time workers as one full-time worker.

Julie Monchamp, controller at Hales Machine Tool Inc. in Plymouth, said she's checking to see if her company is eligible.

Hales pays 100 percent of health premiums for its 23 employees. Last year, premiums jumped 15 percent.

"It's horrible," Monchamp said. "We spend about $12,000 a month on health care."

The company has laid off people and cut hours in the last year. A tax credit might free up some money to bring employees' hours up again somewhat, she said.

The Families USA report was issued jointly with Small Business Majority, a Sausalito, Calif.-based group. They commissioned the Lewin Group, a health care policy and research firm, to analyze data from the U.S. Agency for Health Care Research and Quality and the U.S. Census Bureau to come up with the numbers.

Recruiting tool

The tax credit could also help the smallest employers compete for workers, said Diane Paterson, microenterprise development director at WomenVenture, a St. Paul business consultancy.

"These employers have a low retention rate because they can't afford higher salaries, benefits and vacations," Paterson said. The tax credit "makes [benefits] that much more affordable."

Jen Swendseid, co-owner of a St. Louis Park sports apparel company, Heart & Core, said she was excited to hear about the tax credit. Right now, Swendseid and her sister are the company's only two employees and each gets health insurance elsewhere, in Swendseid's case through her husband's job.

They have a patent application pending on a sports bra for larger-chested women. They're introducing a new style in several colors and plan to expand the company in the next year or two.

"Going forward, [the tax credit] is definitely something we'd consider," she said. "Health care is a huge concern for small businesses."

Chen May Yee • 612-673-7434