By Carol E. Potaczek, J.D.
The IRS has issued guidance on the health coverage tax credit (HCTC), including the amount, relevant procedures, and who may claim it. Also included in the guidance is information for taxpayers who enrolled in a qualified health plan (QHP) through the health care exchanges in tax years 2014 or 2015, who are also eligible for the HCTC, but who claimed or are eligible for the premium tax credit (PTC) or advance premium tax credit (APTC) under section 1412 of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) (IRS Notice, 2016-2, December 22, 2015).
Under IRC sec. 35, as extended through 2019 by the Trade Preferences Extension Act (the Extension Act) (P.L. 114-27), the HCTC is 72.5 percent of the amount paid by an eligible individual for qualified health coverage for the individual and qualifying family members. The IRS states that taxpayers may continue to rely on related guidance previously issued in Notice 2005-50, except where it conflicts with the newly-issued information in this latest guidance.
HCTC eligibility. Under sec. 35, an individual is eligible for the HCTC for a particular month if, as of the first day of that month, he or she meets the following criteria. They must be “eligible” which means that they must be either eligible for trade adjustment assistance (TAA) under a program administered by the Employment and Training Administration of the Labor Department, or they must be eligible alternative TAA or reemployment TAA recipients, or eligible PBGC pension recipients.
An eligible individual may also claim the HCTC for a spouse and for any person they can claim as a dependent on their federal income tax return. They must also pay the premium for and be covered by at least one of the eleven categories of “qualified” health coverage, as described in IRC sec. 35(e), which include COBRA continuation coverage, coverage under a group health plan available through the individual’s spouse, coverage in the individual market, and coverage under certain employee benefits plans funded by a VEBA, or voluntary employees’ beneficiary association.
Health exchange coverage added. Added to this list by the Extension Act is individual health insurance purchased through a health exchange for coverage months in 2014 and 2015 taxable years. A previous requirement applicable for taxable years before 2014 that, to be qualified health coverage, individual market coverage must begin at least 30 days before the taxpayer becomes separated from employment, was removed by the Extension Act.
The IRS points out that qualified health coverage does not include flexible spending arrangements or insurance with substantially all of coverage consisting of excepted benefits. The IRS is also stating that, generally, individuals cannot receive the HCTC if they were enrolled in or had access to certain government-provided health insurance coverage, or were enrolled in or had access to health insurance coverage maintained by any employer if the employer subsidized 50 percent or more of the cost of coverage.
How to claim the HCTC. Starting with taxable years in 2014, an eligible individual must make an annual election to claim the HCTC. The election applies to all subsequent coverage months in that taxable year, and is irrevocable for all those coverage months. Although the election must be made by the due date of the tax return for the applicable tax year, it may be made within the three-year period from the date a return is filed for a taxable year beginning after December 31, 2013, and before June 29, 2015. The Extension Act reauthorized monthly advance HCTC payments.
Interaction with PTC. The PTC is available to help individuals with household income of at least 100 percent but not more than 400 percent of the federal poverty line pay for premiums on insurance purchase through a health care exchange. Those who receive an advance PTC (APTC) and those who wish to claim the PTC must complete Form 8962 and attach it to their tax return. Someone enrolled in a QHP and who is eligible for both the HCTC and the PTC may claim either one for a particular month. However, once an individual makes an election for an HCTC, he or she is ineligible for the PTC for that month and all subsequent months in that taxable year.
The IRS points out that a taxpayer may claim both the PTC and the HCTC in the same month for different coverage, and adds that a unique situation arises if there is qualifying health coverage that covers individuals eligible for the HCTC plus other individuals who do not elect the HCTC. The IRS adds that Notice 2005-50 provided that if qualifying health coverage covers eligible individuals, qualifying family members, and individuals who are non-qualifying beneficiaries, then qualifying health coverage premiums are allocated on an incremental basis. Amounts are attributed first to the eligible individuals and qualifying family members before amounts are allocated to non-qualifying beneficiaries. There were special rules issued after the publication of Notice 2005-50, and the IRS advises that, for the sake of simplicity, to determine the allowable HCTC, taxpayers should apply the rules under 36B to allocate premium amounts and APTC among tax families instead of the using rule in Notice 2005-50.
Therefore, where individuals in a QHP who belong to different tax families, one family may claim the HCTC for the HCTC-eligible individuals in the plan, and the other family may claim the PTC for the other individuals enrolled in the plan. Each family should determine their portion of the enrollment premiums and APTC using the allocation rules of 36B.
Taxpayers with APTC that is in excess of allowable PTC must repay the difference as additional tax. The IRS cautions that, although 36B(f)(2) limits the amount of additional tax that must be repaid, the repayment limitations do not apply to coverage for 2014 or 2015 if HCTC was elected for any month in those particular years. So, someone who elects the HCTC in 2014 or 2015 and received the benefits of APTC for that coverage must repay all of it that is in excess of allowable PTC.
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