By Ken Berry
The Department of the Treasury has released new proposed regulations providing guidance on upcoming health insurance premium tax credits. Beginning in 2014, these tax credits will be available to qualified individuals who enroll in state-operated health insurance exchanges.
Under the Patient Protection and Affordable Care Act of 2010 (PPACA), individuals who are not eligible for health insurance through employment, Medicare, or Medicaid generally can purchase private health insurance through a state-operated exchange. The health insurance premium tax credit is designed to help families with household incomes between 100 and 400 percent of the federal poverty level. A taxpayer's household includes anyone who is claimed as a dependent, regardless of his or her relationship to the taxpayer.
Besides the financial eligibility requirements established by the PPACA, an individual must meet three requirements to qualify for tax credits:
1) The individual must file a return, whether or not taxes are owed;
2) If married, the individual must file a joint return; and
3) The individual cannot be claimed as a dependent on someone else's return.
For this purpose, household income is the total of modified adjusted gross income (MAGI) for all household members required to file tax returns. The household must spend a certain percentage of MAGI based on a special government table. For 2014, the percentage begins at 2 percent for taxpayers with incomes below 133 percent of the federal poverty limit, and it increases to 9.5 percent for taxpayers with incomes up to 400 percent of the federal poverty limit.
Although health insurance premium tax credits will be paid on a monthly basis, the actual amount of the credit must be reconciled when an individual's tax return is filed. Therefore, a taxpayer may be entitled to a refund or be required to pay money back to the government.
Taxpayers who are offered health insurance through their employers, but who would have to pay more than 9.5 percent of their household income for their share of the premiums, can turn down employer-provided coverage. If this occurs, the employer must pay a penalty of $3,000 for each employee, up to a total of $2,000 times the number of full-time employees exceeding 30 full-time employees.
The new proposed regulations include the following points:
- The 9.5 percent limit triggering the employer penalty applies only to the cost of self-only coverage, not to the cost of any family coverage required. This is significant and welcome news to employers.
- If an employer offers coverage costing less than 9.5 percent of an employee's income, the employer will not be penalized, even if the coverage ends up costing more than 9.5 percent of the employee's entire household income and the employee receives a health insurance premium tax credit.
- An employee who chooses employer-sponsored coverage is ineligible for a health insurance premium tax credit, even if the employer coverage is unaffordable.
- An individual is treated as being eligible for employer coverage, even if enrollment for the plan has closed for the plan year if the employee could have enrolled during the last open enrollment period.
- If a state-operated exchange determines employer coverage is not affordable, the employee is eligible for the health insurance premium tax credit for the entire year, even if it is subsequently determined that employer coverage would have been affordable. However, employers might not be penalized in this situation.
- Availability of COBRA continuation coverage will not disqualify an individual from receiving a premium tax credit unless he or she actually purchases the COBRA coverage.
The new proposed regulations also request comments on such matters as the methodology that will be used to determine if employer coverage is inadequate (i.e., when it covers less than 60 percent of total allowed costs of benefits).
You can expect to hear more on this topic in the near future.