The Patient Protection and Affordable Care Act 1 (the Act) transformed the regulation of health insurance markets and health care financing in the United States. The Act includes provisions under which certain low-income individuals may qualify for premium tax credits that assist them with enrolling in “qualified health plans” offered through state-based insurance exchanges. Premium assistance tax credits serve two purposes under the Act: first, they enable low-income individuals to comply with the Act’s “individual mandate,” i.e., the requirement that US citizens and resident aliens obtain and maintain health insurance coverage; and, second, the determination of “assessable payments” imposed on certain large employers that offer coverage to their full-time employees depends on the number of full-time employees who qualify for, and accept, the credit. The Treasury Department recently issued a proposed regulation (the “proposed rule”) implementing the Act’s premium tax credits.

Background

Beginning in 2014, individuals and small businesses will be able to purchase private health insurance through state-based insurance exchanges. Tax credits under the Act are intended to assist individuals and families with purchasing affordable health insurance coverage by reducing out-of-pocket premium costs. State-based insurance exchanges will make advance determinations of eligibility for individuals seeking financial assistance based on information submitted at the time of enrollment. Once an individual qualifies, advance payments are made monthly to the health insurance issuer of the health plan in which the individual chooses to enroll. To be eligible for a premium tax credit, an individual:

  • Must have a household income for the taxable year between 100% and 400% of the federal poverty line (FPL) for the individual’s family size;
  • May not be claimed as a dependent by another taxpayer; and
  • Must file a joint return if married.

“Household income” means modified adjusted gross income of all individuals in a family unit who are required to file an income tax return. “Modified adjusted gross income” means adjusted gross income increased by certain foreign and tax-exempt interest income received by the individual during the taxable year.

The amount of premium assistance credit is the sum of the premium assistance amounts for all “coverage months” in the taxable year. A “coverage month” is any month for which an individual or any family member is covered by a qualified health plan through an exchange and the premium is paid by the individual or through an advance credit payment. A coverage month generally does not, however, include a month in which the individual is eligible for “minimum essential coverage.” Minimum essential coverage for this purpose includes government-sponsored coverage (e.g., Medicare, Medicaid, CHIP, TRICARE, and veterans’ health care). Employer-sponsored plans also may be minimum essential coverage, provided that the employee’s share of the premiums is “affordable” and the coverage provides “minimum value.” An individual is treated as eligible for employer-sponsored minimum essential coverage if the individual actually enrolls in an eligible employer-sponsored plan, even if the coverage does not meet the affordability and minimum value requirements.

Determining the Amount of the Credit

The premium assistance credit amount is the sum of the premium assistance amounts for all coverage months in the taxable year. It is the lesser of:

  1. The premiums for the month for one or more qualified health plans that cover an individual or family member; or
  2. The excess of the “adjusted monthly premium” for a “benchmark plan” over 1/12 of the product of the individual’s household income and the “applicable percentage” for the taxable year.

The adjusted monthly premium is the premium an insurer would charge for the plan adjusted only for the ages of the covered individuals. The benchmark plan is the “second-lowest-cost silver plan” offered by the exchange. The Act directs exchanges to make available four levels of plans: bronze, silver, gold and platinum. A bronze level plan covers 60% of plan costs; silver 70%; gold 80%; and platinum 90%.

An individual’s applicable percentage is designated by the Act, and it increases as the individual’s household income as a percentage of the FPL for the individual’s family size increases. For 2014, the applicable percentage is 2% for individuals with household income up to 133% of the FPL and increases in the following ranges from 3% to 9.5% for individuals with household incomes between 133% and 400% of the FPL.

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The applicable percentages may be adjusted after 2014. Individuals are required to pay the difference between the premium assistance amount and the premium for the plan they choose.

Example:  Assume individual A has household income of $50,353 (275% of the FPL); that she has a family of three; that the second-lowest-cost silver plan in A’s service area charges a premium of $12,000 for family coverage; and that A qualifies for and enrolls in family coverage. A’s initial percentage is 8.05%, and her final percentage is 9.5%. Since  275% is halfway between 250% and 300%, individual A’s applicable percentage is 8.78% (which is halfway between 8.05% and 9.5%). Individual A’s premium credit for the year is $7,579.01—i.e., the lesser of (1) $12,000 (annual premium for the qualified health plan that covers A’s family) or (2) $12,000 minus (household income of 50,353 x an applicable percentage of 8.78%).

Reconciliation

An individual who qualifies for the premium tax credits must reconcile the actual credit for the year with the amount of advance payments made on his or her behalf. If a credit amount exceeds the amount of the advance payments for the taxable year, the individual may be eligible for an income tax refund. Conversely, if an individual’s advance payments exceed the credit amount, the individual must repay the excess as an additional income tax liability. But the Act places a graduated set of caps on the additional tax liability for individuals with household income under 400% of the FPL, ranging from $600 to $2,500 (one-half that amount for single taxpayers) depending on FPL. These amounts are adjusted to reflect changes in the cost of living beginning in 2015.

Information Reporting

Each exchange must report to the IRS, and to the individuals who receive the credit, certain information relating to health plans provided through the exchange, including the amount of any advance credit payments.

The Proposed Rule

Applicable Taxpayers

The proposed rule provides that an individual is eligible for the premium tax credit for a taxable year if the individual is an “applicable taxpayer” and he or she, or a member of his or her family:

  1. Is enrolled in one or more qualified health plans through an exchange; and
  2. Is not eligible for minimum essential coverage other than coverage in the individual market.

To qualify as an “applicable taxpayer,” an individual must have household income that is at least 100% but not more than 400% of the FPL. A lawfully present alien with household income under 100% of the FPL and not eligible for Medicaid is treated as having household income of 100% of the FPL for this purpose. Premium assistance amounts for these individuals are computed based on actual household income.

Special rules apply in the case of individuals (other than lawfully present aliens) with household incomes below 100% of the FPL. These individuals are not eligible for the premium tax credit because they are eligible to receive assistance through Medicaid. An exchange may, however, approve an individual for advance credit payments based on projecting a level of household income for the taxable year that makes the individual ineligible for Medicaid. If the projection turns out to be inaccurate, i.e., the individual’s actual household income for the taxable year is under 100% of the FPL, the individual would not be an applicable taxpayer, and would not be eligible for the credit under the general rule. The proposed rule nevertheless treats an individual with household income below 100% of the FPL as an applicable taxpayer if, when the individual enrolls in a qualified health plan, the exchange projects household income for the individual as between 100% and 400% of the FPL.

Individuals who are incarcerated (other than pending disposition of charges) or who are not lawfully present in the United States may not enroll in a qualified health plan through an exchange. These individuals may, however, have family members who are eligible for exchange coverage. The proposed rule, therefore, provides that an individual who is not lawfully present in the United States or is incarcerated, although not eligible to enroll in a qualified health plan, may be an applicable taxpayer if a family member is eligible and enrolls in a qualified health plan.

Minimum Essential Coverage

As proposed, an individual generally is eligible for government-sponsored minimum essential coverage for any month that the individual meets the requirements for such coverage. For this purpose, an individual is eligible for minimum essential coverage under a veterans’ health care program only if the individual is enrolled in a veterans’ health care program that is specifically identified as offering minimum essential coverage in accordance with regulations to be issued.

Employer-Sponsored Coverage

Minimum essential coverage generally includes coverage under an “eligible employer-sponsored plan.” An eligible employer-sponsored plan is defined to mean: “a group health plan or group health insurance coverage offered by an employer to an employee which is a governmental plan … or … any other plan or coverage offered in the small or large group market, or a grandfathered plan offered in the group market.”

This provision had been the source of some confusion. How does one read the phrase “group health plan or group health insurance coverage offered by an employer”? Is an eligible employer-sponsored plan (1) any “group health plan” or (2) any group health insurance coverage offered by an employer to the employee that is a governmental plan or any other coverage? Or did Congress intend that the words “group health plan” be limited by “which is a governmental plan or any other plan or coverage offered in the small or large group market within a State”? If the latter reading is correct, then no self-funded plan could qualify as minimum creditable coverage. The preamble to the proposed rule suggests that the former reading is the correct one.2

Under the proposal, continuation coverage required under federal law or required under a state law that provides comparable continuation coverage is eligible employer-sponsored coverage, but only if the individual enrolls in the coverage.

Affordability

An employer-sponsored plan is not affordable if the employee’s required contribution exceeds 9.5% of the applicable taxpayer’s household income for the taxable year. (This percentage may be adjusted after 2014.) The “required contribution” for this purpose is the portion of the annual premium that would be paid by the individual for self-only coverage. The proposed rule follows the statute by providing that an employer-sponsored plan also is affordable when the employee’s required contribution for self-only coverage under the plan does not exceed 9.5% of the individual’s household income for the year, even if the employee’s required contribution for family coverage does exceed 9.5% of the applicable taxpayer’s household income for the year. However, the preamble to the proposed rule notes that, for other purposes under the Act, the regulators may choose to determine affordability based on the employee’s required contribution for employer-sponsored family coverage.

The proposed rule establishes an “employee safe harbor” for individuals who were offered eligible employer-sponsored coverage that ultimately proves to be affordable based on household income for the taxable year, but who declined the offer because, at the time of enrollment in a qualified health plan, the exchange determined that the employer coverage would be unaffordable. Under the safe harbor, an eligible employer-sponsored plan is treated as unaffordable for an entire plan year. Thus, for the months during the plan year (which may coincide or overlap with the taxable year), an individual will not lose credit eligibility because, as a result of changes during the taxable year, the employer coverage would have been affordable based on the household income for that taxable year.

A separate safe harbor is prepared for “applicable large employers” that might otherwise be subject to the Act’s employer responsibility mandate. (Applicable large employers—i.e., those with 50 or more full-time equivalent employees—that offer health coverage to their full-time employees and their dependents are subject to an “assessable payment” if at least one full-time employee is certified to receive a premium tax credit or cost-sharing reduction because the employer-sponsored coverage either does not provide minimum value or is unaffordable to the employee.) Under the “employer safe harbor,” an employer that meets certain requirements, including offering its full-time employees (and their dependents) the opportunity to enroll in eligible employer-sponsored coverage, will not be subject to an assessable payment with respect to an employee who receives a premium tax credit or cost-sharing reduction if the employee portion of self-only premium for the lowest-cost plan providing minimum value does not exceed 9.5% of the employee’s W-2 wages from the employer.

Minimum Value

An individual who is eligible for employer-sponsored group health plan coverage may still qualify for the premium tax credit if the plan fails to provide “minimum value.” A plan provides minimum value if the plan’s share of the total allowed costs of benefits provided under the plan is at least 60% of those costs. It will be up to the Department of Health and Human Services to establish rules governing the determination of the percentage of the total allowed costs of benefits. The preamble to the proposed regulation reports that the Department of Health and Human Services is contemplating “whether to provide appropriate transition relief with respect to the minimum value requirement for employers currently offering health care coverage.”

Computing the Premium Tax Credit

An individual’s premium tax credit is the sum of the premium assistance amounts for each coverage month in the taxable year, based on household income, family size, applicable percentage, benchmark plan premium, and actual plan premium. Household income is prorated for each month to determine the monthly premium assistance amount. The applicable percentage is the same for each month because it is derived from annual household income and family size. The monthly premium for the applicable second-lowest-cost silver plan offered through an exchange is the benchmark for computing an individual’s monthly premium assistance amount. To determine the amount of premium tax credit, an individual must compute the difference between the premium for this plan and the applicable percentage of the individual’s household income.

Special rules are proposed where an exchange offers multiple categories of coverage (e.g., plans may offer other categories of coverage based on family composition, such as children only, two adults, or one adult plus children). The proposed rule defines “family coverage” as any health insurance that covers more than one individual. Under the proposed regulations, the applicable benchmark plan for an individual is determined by finding the second-lowest cost plan at the silver level that would cover those family members actually enrolled in a qualified health plan.

Reconciling the Credit and Advance Credit Payments

The proposed rule describes the requirements for reconciling advance payments of the credit with the actual credit amount and determining the amount of any resulting additional credit or additional income tax liability. The credit is computed by using the household income and family size for the taxable year, but premium assistance amounts for different coverage months may be based on different applicable benchmark plans if, for example, the individual’s family composition changes during the taxable year.

Effective Date

The proposed rule anticipates that the regulation under the Act’s premium tax credit standard will apply for taxable years ending after December 31, 2013.