By Wolters Kluwer Editorial Staff
The IRS has released proposed regulations relating to the health insurance premium tax credit (premium tax credit) and the individual shared responsibility provision of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) (see Proposed rule, 81 FR 44557, July 8, 2016; IRS offers clarity on premium tax credit eligibility, July 13, 2016). Beginning in 2014, individuals must have qualifying health care coverage (called minimum essential coverage) or make an individual shared responsibility payment. Eligible individuals who purchase coverage under a qualified health plan through an exchange may claim a premium tax credit, the amount of which is determined in part by projections of the taxpayer’s household income and family size for the taxable year. Taxpayers who receive the benefit of advance credit payments are required to file an income tax return to reconcile the amount of advance credit payments made during the year with the amount of the credit allowable for the taxable year. The proposed regulations provide guidance and clarification on eligibility for the premium tax credit (including guidance on opt-out arrangements), the amount of the tax credit, figuring out the benchmark plan premium, and information reporting. The proposed regulations are generally proposed to apply for tax years beginning after December 31, 2016, though taxpayers may rely on certain provisions of the proposed regulations for tax years ending after December 31, 2013. In addition, several rules are proposed to apply for tax years beginning after December 31, 2018.
Eligibility. To avoid repayments of advance credit payments for taxpayers who experience an unforeseen decline in income, the existing regulations provide that if an exchange determines at enrollment that the taxpayer’s household income will be at least 100 percent but will not exceed 400 percent of the applicable federal poverty level (FPL), the taxpayer will not lose his or her status as an applicable taxpayer solely because household income for the year turns out to be below 100 percent of the applicable FPL. The existing regulations also do not require a repayment of advance credit payments for taxpayers with household income within the range for eligibility for certain government-sponsored programs if an exchange determined or considered the taxpayer or a member of the taxpayer’s family to be ineligible for the program.
To reduce the likelihood that individuals who recklessly or intentionally provide inaccurate information to an exchange will benefit from an exchange determination, the proposed regulations provide that a taxpayer whose household income is below 100 percent of the FPL for the taxpayer’s family size is not treated as an applicable taxpayer if, with intentional or reckless disregard for the facts, the taxpayer provided incorrect information to an exchange for the year of coverage. Also, an individual who was determined or considered by an exchange to be ineligible for Medicaid, the Children’s Health Insurance Program (CHIP), or a similar program (such as a Basic Health Program) may be treated as eligible for coverage under the program if, with intentional or reckless disregard for the facts, the individual (or a person claiming a personal exemption for the individual) provided incorrect information to the exchange.
Employers occasionally provide their employees with opt-out programs, which can cause issues when determining the affordability of an employer’s offer of eligible employer-sponsored coverage. An opt-out payment is a payment that (1) is available only if the employee declines coverage (which includes waiving coverage in which the employee would otherwise be enrolled) under the employer-sponsored plan, and (2) cannot be used to pay for coverage under the employer-sponsored plan. The IRS has previously determined that it is generally appropriate to treat an opt-out payment that is made available under an unconditional opt-out arrangement in the same manner as a salary reduction contribution for purposes of determining an employee’s required contribution. The proposed regulations provide that amounts made available under conditional opt-out arrangements are disregarded in determining the required contribution if the arrangement satisfies certain conditions (an "eligible opt-out arrangement"), but otherwise the amounts are taken into account.
The proposed regulations define an "eligible opt-out arrangement" as an arrangement under which the employee’s right to receive the opt-out payment is conditioned on (1) the employee declining to enroll in the employer-sponsored coverage and (2) the employee providing reasonable evidence that the employee and all other individuals for whom the employee reasonably expects to claim a personal exemption deduction for the tax year or years that begin or end in or with the employer’s plan year to which the opt-out arrangement applies (employee’s expected tax family) have or will have minimum essential coverage (other than coverage in the individual market, whether or not obtained through the marketplace) during the period of coverage to which the opt-out arrangement applies. For example, if an employee’s expected tax family consists of the employee, the employee’s spouse, and two children, the employee would meet this requirement by providing reasonable evidence that the employee, the employee’s spouse, and the two children, will have coverage under the group health plan of the spouse’s employer for the period to which the opt-out arrangement applies.
Premium assistance amounts. Under the current regulations, a month in which an individual who is enrolled in a qualified health plan is a coverage month for the individual only if the taxpayer’s share of the premium for the individual’s coverage for the month is paid by the unextended due date of the taxpayer’s income tax return for the year of coverage, or the premium is fully paid by advance credit payments. The proposed regulations provide that a taxpayer who is eligible for advance credit payments pursuant to an eligibility appeal for a member of the taxpayer’s family who, based on the appeals decision, retroactively enrolls in a qualified health plan, is considered to have met the requirement in for a month if the taxpayer pays the taxpayer’s share of the premium for coverage under the plan for the month on or before the 120th day following the date of the appeals decision. To provide consistency for all individuals who have a coverage month that is less than a full calendar month, the proposed regulations also provide that the premium assistance amount for a month is the lesser of the enrollment premiums for the month (reduced by any amounts that were refunded), or the excess of the benchmark plan premium over the contribution amount for the month. Taxpayers may rely on these rules for all taxable years beginning after December 31, 2013.
Benchmark plan premium. The premium assistance amount that an individual can obtain is calculated based on the applicable benchmark plan, which is the second lowest cost silver plan available through the applicable marketplace that provides self-only coverage or "family coverage," depending generally on whether the coverage family includes one or more individuals. Insurers are permitted to offer plans that include all essential health benefits except for pediatric dental benefits, if they offer those dental benefits under another, standalone plan. Under the existing regulations, the references to plans that provide self-only coverage and family coverage are interpreted to refer to all qualified health plans offered through the applicable marketplace, regardless of whether the coverage offered by those plans includes all ten essential health benefits. Because qualified health plans that do not offer pediatric dental benefits tend to be cheaper than qualified health plans that cover all ten essential health benefits, the second lowest-cost silver plan (and, therefore, the premium tax credit) for taxpayers purchasing coverage through a marketplace in which stand-alone dental plans are offered is likely to not account for the cost of obtaining pediatric dental coverage.
The proposed regulations provide that for tax years beginning after December 31, 2018, if an exchange offers one or more silver-level qualified health plans that do not cover pediatric dental benefits, the applicable benchmark plan is determined by ranking-
- the premiums for the silver level qualified health plans that include pediatric dental benefits offered by the exchange and
- the aggregate of the premiums for the silver-level qualified health plans offered by the exchange that do not include pediatric dental benefits plus the portion of the premium allocable to pediatric dental benefits for stand-alone dental plans offered by the exchange.
In constructing this ranking, the premium for the lowest-cost silver plan that does not include pediatric dental benefits is added to the premium allocable to pediatric dental benefits for the lowest cost stand-alone dental plan, and similarly, the premium for the second lowest-cost silver plan that does not include pediatric dental benefits is added to the premium allocable to pediatric dental benefits for the second lowest-cost stand-alone dental plan. The second lowest-cost amount from this combined ranking is the taxpayer’s applicable benchmark plan premium. The proposed regulations also propose that if there is only one silver-level qualified health plan offered through the exchange that would cover all members of the taxpayer’s coverage family (whether under one policy or multiple policies), that silver-level plan is used for purposes of the taxpayer’s applicable benchmark plan. Similarly, if there is only one stand-alone dental plan offered through the exchange that would cover all members of the taxpayer’s coverage family (whether under one policy or multiple policies), the portion of the premium of that plan that is allocable to pediatric dental benefits is used for purposes of determining the taxpayer’s applicable benchmark plan.
Information reporting. If a qualified health plan covers more than one family under a single policy (for example, a plan covers a taxpayer and the taxpayer’s child who is 25 and not a dependent of the taxpayer), the premium tax credit is computed for each applicable taxpayer covered by the plan. In addition, in computing the tax credit for each taxpayer, premiums for the qualified health plan the taxpayers purchase (the enrollment premiums) are allocated to each taxpayer in proportion to the premiums for each taxpayer’s applicable benchmark plan. The existing regulations provide that the Exchange must report the enrollment premiums for each family, but do not specify the manner in which the Exchange must divide the enrollment premiums among the families enrolled in the policy. The proposed regulations clarify that when multiple families enroll in a single qualified health plan and advance credit payments are made for the coverage, the enrollment premiums reported by the exchange for each family is the family’s allocable share of the enrollment premiums, which is based on the proportion of each family’s applicable benchmark plan premium.
Excerpted from Client Relate Bulletin: Proposed regulations on the premium tax credit, which published in Federal Tax Day on July 14, 2016.
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