This Implementation Brief Includes Tax Subsidy Amendments Passed by the Senate as of December 9, 2010.

By Sara Rosenbaum

Background

For most Americans, financial assistance is essential to making health insurance affordable. Financial assistance toward the cost of insurance can take two basic forms: as a tax benefit, or as a directly subsidized coverage as a result of enrollment in a public insurance program such as Medicaid or the Children’s Health Insurance Program (CHIP). Tax benefits are available to individuals who are employed at firms that elect to both offer employer-sponsored health benefits to workers and their families and pay some or all of the premium costs associated with health plan enrollment. Most employers that offer coverage also contribute to its cost, and their contributions are excluded from their workers’ taxable incomes, further enhancing their value because they are tax free. In 2010, contributing employers paid an average of 80% of the individual premium and 70% of the family premium.^[1] Without this subsidy, most families would struggle with the cost of coverage: The average annual cost of an individual premium for employer-sponsored insurance now stands at $5,049, while the average annual cost of family coverage is $13,770.^[2]

Because the value of tax breaks is greater for people in higher income brackets, the benefits conferred by the employer exclusion rise as family incomes rise. Furthermore, the size of the health insurance tax exclusion is considerable in terms of the revenues that are lost to the federal government as a result of not treating employer premiums as taxable income. The dollar value of the exclusion has been estimated at $240 billion in 2010 and $3.5 trillion over the 2010-2019 time period.^[3]

For individuals without access to employer-funded health insurance coverage and ineligible for assistance under a public insurance program, U.S. policy offers no alternative. Of the more than 50 million non-elderly uninsured Americans in 2009, three-quarters are members of working families and 90% have incomes below four times the federal poverty level (FPL; about $88,000 in 2010 for a family of four).^[4] Without assistance, the cost of health insurance for these individuals and families would be virtually impossible to manage.

Changes Made by the Health Reform Law
P.L. 111-148 as amended by P.L. 111-152

The Affordable Care Act (ACA) establishes a refundable tax credit^[5] for individuals without affordable employer coverage and ineligible for Medicaid:

• The Internal Revenue Code is amended to permit payment of a refundable tax credit in the case of “applicable tax payers.” This refundable tax credit is equal to the “premium assistance credit” to which the taxpayer may be entitled during the year.^[6]

• The size of the premium assistance credit a taxpayer can receive equals the allowable monthly cost of the premium paid for a “qualified health plan”^[7] purchased through a state health insurance exchange, adjusted to take into account the taxpayer’s income.^[8] As taxpayer income rises, the value of the subsidy thus is reduced.

• The premium assistance credit is pegged is the second lowest cost “silver plan” offered by the health insurance exchange in the “rating area” in which the taxpayer resides.^[9] A silver plan under the ACA is a qualified health plan with an actuarial value of 70 percent; this means that on average, the plan will cover 70 percent of the cost of covered services for a typical beneficiary population and the member will be responsible for the remaining 30 percent, as well as the cost of uncovered treatments and services.

• Because lower-income families may be unable to afford the cost-sharing associated with a plan with a 70 percent actuarial value, the ACA also provides cost-sharing credits for individuals and families with household income below 400 percent of the poverty level, although assistance is principally focused on families with incomes below 250 percent of the federal poverty level.^[10] Individuals with incomes above this level receive a reduction on the plan’s annual out-of-pocket payment limit, but only if the reduction does not significantly increase a plan’s actuarial value. The cost-sharing assistance means that health plan enrollees with family incomes below 150 percent of the poverty level will receive cost-sharing assistance sufficient to increase their plan’s actuarial value to 94 percent, leaving them with a 6 percent out-of-pocket responsibility for covered services. For individuals with incomes between 150 percent and 200 percent of the federal poverty level, the cost-sharing assistance will increase the plan’s actuarial value to 87 percent. Special rules for American Indians eliminate all cost-sharing for individuals and families with household income that does not exceed 300 percent of the federal poverty level.^[11]

• The amount of the premium assistance credit falls as taxpayer income rises. For eligible individuals with incomes “up to” 133 percent of the federal poverty level, the subsidy is high enough to reduce an individual’s premium payment to 2 percent of “household income.”^[12] As income rises to 400 percent of the federal poverty level, the subsidy declines, increasing the monthly cost to 9.5 percent of monthly household income. In tax years after 2014, the subsidy value is indexed to take into account the excess rate of health insurance premium growth compared to the growth of annual income.^[13]

• The term “applicable taxpayer” means a “taxpayer whose income for the taxable year” equals or exceeds 100 percent but not more than 400 percent of the federal poverty level.^[14] At the same time, the premium credit is not available during any month in which a taxpayer is “eligible for” “minimum essential coverage,” defined under the ACA to consist of Medicare, Medicaid, CHIP, TRICARE, veterans health care, an employer-sponsored plan (which includes Peace Corps coverage), an individual plan, or grandfathered coverage.^[15]

• Taxpayers not lawfully present in the U.S. are ineligible for premium credits. However, taxpayers who are lawfully present in the U.S. are eligible to receive credits. A special rule for individuals who have been lawfully present in the U.S. for fewer than 5 years allows premium credits to be paid even if family income is below the 100 percent threshold because such individuals are ineligible for Medicaid^[16] as a result of Medicaid’s five-year exclusionary waiting period for recently arrived legal residents.

• The ACA revises the term “household income” to mean the “modified adjusted gross income” (MAGI) of the taxpayer plus the “aggregate modified adjusted gross income” of “all other individuals who were taken into account in determining the taxpayer’s family size for purposes of taxes owed and who were required to file a tax return for the year.”^[17]

• Premium credits are paid for “coverage months.” A coverage month is any month in which (a) the taxpayer is covered by a qualified health plan bought through a state health insurance exchange, and (b) the taxpayer uses the advance tax credit system to defray the cost of coverage.^[18]

• Taxpayers whose incomes fall within the premium credit range and whose employer-sponsored coverage is considered not to be “affordable” may qualify for enrollment in a qualified health plan purchased through an exchange, as well as for a premium subsidy. Affordable employer coverage is defined as coverage that does not expose a taxpayer to a “required contribution” exceeding 9.5 percent of applicable household income and that amounts to at least 60 percent of the actuarial value of the plan.^[19]

• Because the tax credit is advanced against the taxpayer’s latest reported taxable annual income, an individual may receive more tax credits than current income would justify. Thus, in cases in which a taxpayer experiences “excess advance payments,” the law provides that the taxpayer must repay the excess in the form of an additional tax payment representing the amount owed for that year.^[20] Repayment cannot exceed $400 in the case of individuals with incomes below 400 percent of the federal poverty level.^[21] However, amendments to the ACA passed by the Senate on December 8, 2010 as part of the Medicare and Medicaid Extenders Act of 2010^[22] would significantly increase the amount that can be recouped in the case of “advance payments to a taxpayer,” as follows:
  • $600 in the case of families with household incomes under 200% FPL;
  • $1,000 in the case of families with household incomes between 200%-250% FP
  • $1,500 in the case of families with household incomes between 250% and 300% FPL;
  • $2,000 in the case of families with household incomes between 300% and 350% FPL;
  • $2,500 in the case of families with household incomes between 350% and 400% FPL;
  • $3,000 in the case of families with household incomes between 400% and 450% FPL; and
  • $3,500 in the case of families with household incomes between 450% and 500% FPL.

• In order to protect individuals against repayment exposure, the law also requires the HHS Secretary to provide procedures for “making advance determinations on the basis of information other than tax information in cases where information included with an application form demonstrates substantial changes in income, changes in family size or other household circumstances, changes in filing status, the filing of an application for unemployment benefits, or other significant changes affecting eligibility. . ..” The ACA specifies that individuals who claim a 20% or greater drop in income from the previous year or who are filing an application for unemployment benefits have a right to “have eligibility for the credit determined on the basis of household income for a later period or on the basis of the individual’s estimate of such income for the taxable year. . ..”^[23]

• The ACA requires the Secretary of HHS to establish a program for determining both whether individuals are eligible for enrollment in qualified health plans and whether they are eligible for either premium tax credits or reduced cost sharing.^[24] The ACA also requires that the HHS Secretary, in consultation with the Treasury Secretary, develop and implement an advance tax credit payment system that would operate for individuals purchasing coverage through state exchanges. Eligibility determinations for advance tax credits must be made during open enrollment periods as well as “such other enrollment period as may be specified by the Secretary.”^[25] Applicants must provide a range of information including information regarding identity, citizenship and legal residency status, information about income and family size, changes in circumstances, and information needed to ascertain the availability of employer insurance.^[26] Information furnished to Exchanges for submission to the Secretary’s program must be verified; individuals can be certified for tax credits for up to 90 days while their applications are being processed if problems arise in the verification process.^[27]

• The ACA provides that advance credits and cost-sharing reduction payments are to be paid directly to health insurers.^[28] To accomplish this, the law directs the Secretary to “make advance payments of such credit or reductions to the issuers of the qualified health plans in order to reduce the premiums payable by individuals eligible for the credit.”^[29]

Implementation

Agency

The U.S. Department of Health and Human Services, in consultation with the Secretary of the Treasury, is responsible for implementation of the advance eligibility determination system for the premium tax credit, while the Internal Revenue Service administers the tax credit for premiums and cost-sharing assistance. The HHS Secretary is responsible for implementation of the Medicaid expansion, as well as oversight of health insurance Exchanges through which individuals will be able to apply for all available subsidies whether advance tax credits, Medicaid, CHIP coverage, or any other state subsidy program.

Key Dates

The advance tax credits become available and the Medicaid expansions go into effect beginning January 1, 2014. However, because enrollment into qualified health plans available through exchanges begins prior to this date, regulations implementing both forms of subsidies are anticipated well before this date.

Process

Because the subsidies constitute an entitlement, HHS and Treasury can be expected to issue formal regulations, supplemented by informal agency guidance.

Key Issues

• Initial eligibility determinations for the advance tax credit. The ACA specifies tax credits for plans sold in exchanges. The ACA also envisions a system in which individuals will have their eligibility for advance tax credits determined when they seek enrollment in qualified health plans sold in exchanges. What procedures will be specified for the eligibility determination process? For example:
  • What information will be required in order to determine if the individual is not eligible for “minimum essential coverage”?
  • What information about current year income will be collected in order to determine the reliability of taxable income information available from a prior year’s tax return, which will serve as the basis for calculating the dollar value of the advance tax credit, since current income actually may be higher or lower?
  • What procedures will be established for verification of information, including information regarding citizenship and legal status?
  • How will MAGI be interpreted in order to assure that income information reflects household, and not just family, income?
  • What information will be provided to taxpayers regarding the potential exposure to recoupment of excess tax credit payments?
  • What procedures will be adopted so that taxpayers can report current year changes in income (either increased or decreased income) as they occur, in order to avert or mitigate a subsequent recoupment and in order to assure that payments made to plans for enrollment months are in fact accurate for the enrollment month in which the payment is made?
  • Will the same procedures be used to determine eligibility for cost-sharing assistance?
  • What information will qualified health plans be required to furnish taxpayers about the premium and cost-sharing assistance they receive?
  • What appeals procedures will be specified so that a taxpayer can appeal either the denial of an advance credit in any month or a credit that the taxpayer believes is too low?

• Reporting changes in income in order to avoid recoupment. The ACA provides for recoupment of excess advance tax credits, and Senate amendments, if enacted into law, will considerably increase the level of excess payments for which a taxpayer is liable. What recoupment procedures will be used to assure that the taxpayer remains eligible for payments during any premium coverage month?
  • What justifications might taxpayers be allowed to present in order to avoid recoupment?
  • How will recoupment be effectuated? For example, will recoupment be adjusted against a taxpayer’s earned income tax credit?

• Who are “applicable tax payers” eligible for the tax credit? The ACA specifies that in order to be eligible for an advance tax credit, an individual must be an “applicable taxpayer.” The ACA further specifies that an “applicable taxpayer” is a “taxpayer” whose income falls between 100% and 400% of the FPL (with an exception for short-term legal residents, whose incomes may fall below 100% FPL). Will the term “taxpayer” encompass all forms of taxes paid?

• Coordination with Medicaid. The ACA specifies coordination between Medicaid enrollment and enrollment in exchanges for purposes of having eligibility determined for premium and cost-sharing assistance. What procedures will be required to achieve coordination, particularly in the case of individuals who are initially disqualified for advance tax credits because they are believed to be Medicaid-eligible and individuals who, during an enrollment year, experience a decline in income sufficient to qualify them for Medicaid and thereby disqualify them from receiving an advance tax credit?

Recent Agency Action

None.

Authorized Funding Levels

Both the tax credits and Medicaid expansions represent mandatory spending on individuals entitled to the assistance and funding thus is up to the level of need.