The Internal Revenue Service ("IRS") recently issued a series of final and proposed regulations relating to the health insurance premium tax credit. Enacted by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 ("ACA"), the premium tax credit is set forth in Section 36B of the Internal Revenue Code. Its purpose is to help individuals purchase health insurance through Affordable Insurance Exchanges, now referred to as the Health Insurance Marketplace ("Marketplace"). Individuals who purchase health coverage through the Marketplace will be eligible for this tax credit for tax years beginning after December 31, 2013. The Congressional Budget Office estimates that the tax credit will be available to approximately 20 million individuals.
In February, the IRS issued final regulations providing guidance to individuals who wish to enroll in qualified health plans and claim the premium tax credit, and to the Marketplaces that make qualified health plans available to individuals and employers ("Final Regulations"). These regulations were effective February 1, 2013.
In April, the IRS issued proposed regulations containing rules for determining whether an eligible employer sponsored health plan provides minimum value ("Proposed Regulations"). If implemented, these regulations would be effective for tax years ending after December 31, 2013.
The ACA allows individuals to purchase health insurance through the Marketplace if they are not eligible for Medicare, Medicaid, or employer-sponsored health coverage that meets certain standards. An individual who is eligible for employer-sponsored coverage and purchases coverage through the Marketplace may claim the tax credit only if the employer-sponsored plan’s coverage is either unaffordable or fails to provide minimum value. However, an employee, or a member of an employee’s family, who actually enrolls in an employer-sponsored plan is not eligible for the tax credit, even if the plan is either unaffordable or does not provide minimum value.
There is an exception to this rule for an employee who is automatically enrolled in an employer-sponsored plan that is unaffordable. Such an individual may nonetheless claim the tax credit if he or she disenrolls from the plan before the last day of any opt-out period or, if later, the first day of the second full calendar month of the plan year.
A plan is unaffordable if the portion of the annual premium that the employee must pay for self-only coverage in the employer’s lowest cost plan that provides minimum value exceeds 9.5 percent of the taxpayer’s household income. A plan fails to provide minimum value if the plan’s share of the total allowed benefit costs covered by the plan is less than 60 percent. Total allowed costs are the anticipated covered medical spending for essential health benefits coverage paid by a health plan for a standard population, computed in accordance with the plan’s cost-sharing, and divided by the total anticipated allowed charges for essential health benefits coverage provided to a standard population. The regulations also state that the standard population used to compute this percentage for minimum value reflects the population covered by typical self-insured group plans.
Individuals who purchase coverage through the Marketplace are eligible for the tax credit if their total household income is between 100 and 400 percent of the federal poverty line ("FPL"). In 2013, 100% of the FPL for a household of four is $23,550, and 400% is $94,200. Household income, for this purpose, means the household’s "modified adjusted gross income," which is equal to the household’s adjusted gross income, plus certain foreign-based income, tax-exempt income, and otherwise excluded social security benefits. The IRS determines eligibility based on the individual’s income for the tax year that ends two years prior to his or her enrollment period.
Effect of Dependents on Amount of Tax Credit
Among the most controversial aspects of the Final Regulations is that they retain a provision of the proposed regulations that bases affordability for family coverage on the employee’s cost for self-only coverage. Thus, regardless of the cost that an employee must pay for coverage for the employee’s entire family under an employer’s health plan, the employer’s plan is deemed "unaffordable"—and the employee is therefore entitled to the tax credit—only if the premium that the employee must pay for self-only coverage in the employer’s lowest cost plan that provides minimum value exceeds 9.5 percent of his or her household income.
The Final Regulations illustrate this concept with an example in which the cost for self-only coverage for an employee under his employer’s plan does not exceed 9.5 percent of household income. However, the plan requires the employee to contribute 11.3 percent of household income in order to cover both the employee and the spouse. This plan is, nonetheless, affordable because the required contribution for the employee’s self-only coverage in the employer’s lowest cost plan that provides minimum value does not exceed 9.5 percent of household income.
Calculation of Minimum Value
The Proposed Regulations allow a plan sponsor to calculate minimum value using one of the following four methods:
- The minimum value calculator provided by the IRS and Department of Health and Human Services (HHS) (available at http://cciio.cms.gov/resources/regulations/index.html)
- A safe harbor established by HHS and the IRS (which generally require plans to contain certain deductibles, co-pays, co-insurance, and maximum out of pocket costs)
- Actuarial certification (for plans with nonstandard features that are incompatible with either the minimum value calculator or a safe harbor
- If the plan is in the small group market, by meeting the requirements for any level of metal coverage defined in the regulations (i.e., bronze, silver, gold, or platinum).
Health Reimbursement Arrangements
The Proposed Regulations clarify how contributions and amounts newly made available under a health reimbursement arrangement ("HRA") should be counted towards the plan’s share of costs included in calculating minimum value. Namely, amounts that are newly made available for the current plan year under an HRA that is integrated with an eligible employer-sponsored plan count for purposes of minimum value if the amounts may be used only for cost-sharing and may not be used to pay insurance premiums.
Health Savings Accounts
The Proposed Regulations provide that all amounts the employer contributes to a health savings account ("HSA") for the current plan year should be counted towards the plan’s share of costs included in calculating minimum value.
Wellness Program Incentives
The Proposed Regulations also address the manner in which wellness program incentives, such as reduced costs for participants who do not use tobacco, are counted in determining the affordability of eligible employer-sponsored coverage. The Proposed Regulations state that a plan's share of costs for minimum value purposes is determined without regard to reduced cost-sharing available under a nondiscriminatory wellness program other than a program designed to prevent or reduce tobacco use. Nondiscriminatory wellness programs designed to prevent or reduce tobacco use may be counted in calculating minimum value by assuming that every eligible individual satisfies the terms of the program relating to prevention or reduction of tobacco use.
Other Issues Addressed in the April Proposed Regulations
The Proposed Regulations also clarify:
- That there is no de minimis exception to the minimum value requirement
- The definition of the "rating area" that is used to determine costs of plans in the area in which the taxpayer lives
- How retiree coverage is included as minimum essential coverage
- The definition of coverage months for newborns and new adoptees
- How to calculate the adjusted monthly premium for family members not enrolled for a full month (such as for a newborn child)
- How to calculate the premium assistance amount when coverage is terminated before the last day of the month
- That premiums for family members residing in different states who enroll in different health plans can be added together
Amount of the Credit
The amount of the tax credit is tied to the amount of the premium. The Congressional Budget Office estimates that an individual who receives the tax credit will, on average, receive a subsidy of approximately $5,000 per year. The credit is generally equal to the difference between the premium for the "benchmark plan" and the taxpayer’s "expected contribution." These concepts are illustrated in more detail below.
The expected contribution is a specified percentage of the taxpayer’s household income, and represents the maximum amount that an individual is required to pay for health insurance under the ACA. This percentage increases from 2 percent of income for families at 100 percent of the Federal Poverty Level ("FPL"), to 9.5 percent of income for families at 400 percent of FPL. In particular, the expected contributions are as follows:
Click here to see data.
The benchmark plan, for the purpose of calculating the premium tax credit, is the second-lowest-cost plan that would cover the family at a specified level of coverage. The ACA specifies that this level of coverage is equal to the "silver" level of coverage. A silver plan is a plan that provides Essential Health Benefits ("EHBs"), and that pays at least 70 percent of the costs of covered benefits. EHBs include, at a minimum, the following services: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health benefits and substance use disorder services, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, and pediatric services including oral and vision care.
The cost of the benchmark plan will vary from individual to individual. It will, for example, be higher for an older couple than for a younger couple. This will entitle the older couple to a correspondingly higher tax credit.
A family is not required to purchase the benchmark plan; they may instead opt for a lower- or higher- cost plan. This will not affect the amount of the tax credit. An individual who purchases a plan that is more expensive than the benchmark plan would have to pay the full difference between the cost of the benchmark plan and the plan that he or she actually purchases.
Tax Credit Advances
The IRS will make the tax credit payments directly to the insurance company on the individual’s behalf. The IRS will then reconcile the amount of the advance payment against the amount of the individual’s actual tax credit, based on the individual’s federal income tax return. Any repayment that the individual is ultimately responsible for, however, is capped if the individual’s income is under 400 percent of the FPL. These caps range from $600 for married taxpayers ($300 for single taxpayers) with household incomes under 200 percent of the FPL to $2,500 for married taxpayers ($1,250 for single taxpayers) with household incomes between 300 and 400 percent of the FPL. However, if the individual’s family ends the year with a household income below 100 percent of the FPL, the individual is not required to repay any portion of the advance payment.