By Katherine Jett Hayes

Background

The Affordable Care Act (ACA) established refundable premium and cost-sharing tax credits to help make health insurance more affordable to lower-and middle-income individuals without employer-sponsored health insurance or other form of “minimum essential coverage.”^[1] Under the ACA, individuals eligible for the premium tax credit must have annual incomes between 100 and 400 percent of the federal poverty level (FPL); tax credits are also available for legal immigrants with incomes below 100 percent of the FPL and not eligible for Medicaid.^[2] The refundable premium tax credits are available for the purchase of health insurance coverage offered through health insurance Exchanges.

The monthly premium assistance amount is the lesser of the premium in which the individual is enrolled through the Exchange, or the excess of the premium for the benchmark plan (second lowest cost silver plan) over the applicable percentage of the taxpayer’s household income.^[3] Premium credits are not paid for months in which individuals are eligible for “minimum essential coverage,” which includes government-sponsored coverage such as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), TRICARE, and veterans’ health programs, as well as employer-sponsored coverage that meets certain minimum standards related to affordability and minimum value. In addition to creating challenges related to the continuity of enrollment and care, this limitation means that the failure on the part of an Exchange and a state Medicaid program to promptly change an individual’s enrollment status based on current information could result in financial liability for individuals whose annual incomes fall below the federal poverty level or who become Medicaid-eligible and yet continue to receive premium tax credits. The ACA thus appears to create the potential for repayment liability exposure for Medicaid-eligible persons with below-poverty income.

Under the ACA, an individual with employer-sponsored coverage is not considered to have “minimum essential coverage” (making the individual eligible for tax credits) if; 1) employer premiums are “unaffordable” (meaning the employee’s contribution for an individual plan exceeds 9.5 percent of household income);^[4] or 2) the employer coverage does not provide minimum value (meaning the employer contribution is less than 60 percent of the plan’s actuarial value.^[5] Where employer premiums are determined to be unaffordable, or the employer plan offers less than “minimum value,” individuals are not considered to have minimum essential coverage and can qualify for premium tax credits to purchase qualified health plan coverage. However, regardless of affordability or the fact that the employer plan offers less than minimum essential coverage, individuals who actually enroll in their employer plans are considered ineligible for premium tax credits.^[6] For detailed information regarding eligibility and the calculation of premium assistance, see the Health Reform GPS Implementation Brief, “Tax Subsidies for Individuals and Families who Purchase Coverage through State Health insurance Exchanges.”

Overview of the Premium Tax Credit NPRM

On August 17, 2011, the Department of Treasury (Treasury) issued proposed regulations on the health insurance premium tax credits.^[7] The proposed regulations provide additional guidance on implementation of the credits, including how Treasury will calculate the premium tax credit amount, as well as a reconciliation process that taxpayers must complete as part of their tax returns to address changes in income (or family circumstances affecting their income in relation to the federal poverty level) during the year. In addition, the proposed rule addresses a number of issues that have arisen since enactment of the ACA, including how the reconciliation process will apply to people who are Medicaid-eligible or whose incomes actually fall below the federal poverty level. The NPRM also addresses the question of when employer-sponsored coverage will be considered “affordable.” These and other key issues are outlined below.

Calculation of Premium Tax Credit Amounts and Reconciliation

The NPRM:

• Provides that premium assistance equals the lesser of:
  • the monthly premium paid for coverage for one or more qualified health plans; or
  • the amount by which the benchmark plan monthly premium exceeds the product of the taxpayer’s household income and the “applicable percentage”^[8] divided by 12 (to calculate monthly amount).^[9]
• Clarifies that the benchmark plan is the second lowest cost silver plan offered at the time a taxpayer or family member enrolls in a qualified health plan through the Exchange in the rating area in which the taxpayer resides, adjusted for family size, even if the benchmark plan is no long accepting enrollees.^[10]
• Requires taxpayers receiving premium tax credits to file income tax returns,^[11] which will include reconciliation for years that they receive advance premium tax credits.^[12] In years that individuals received an overpayment (i.e., premium credits in excess of the amount permissible under the formula in relation to annual family income), the NPRM requires that the taxpayer must refund the overpayment. Taxpayers whose premium credit exceeds the advance credit payments may receive the excess as an income tax refund. The taxpayers’ contribution amount is based on household income and size at the end of the taxable year, and includes provisions that address calculations based on changes in filing status.^[13]
• limits taxpayer liability for overpayments, based on income and filing status. The overpayment repayment liability under this limitation ranges from $300 to $2,500.^[14]

Premium Tax Credits and Federal Programs

The NPRM:

• establishes a safe harbor by providing that if an individual is determined to be ineligible for Medicaid or CHIP and has a subsequent change income or other status that results in Medicaid-eligibility, but the individual is not shifted into Medicaid, the individual would be treated as ineligible for Medicaid through the plan year, and would be eligible for premium tax credits.^[15]
• provides that in the event that Medicaid eligibility is established during the year, an Exchange is required to discontinue tax credit payments on the first day of the first calendar month following approval and discontinue the tax credits.^[16]
• provides a similar safe harbor for individuals whose incomes fall below 100 percent FPL for the year and who would thereby lose eligibility for premium tax credits.^[17]
• protects individuals against loss of the premium tax credit when a family member is eligible for a government program but is not receiving benefits because of administrative processing delays, while terminating credits for individuals who fail to comply reasonably promptly with requirements to obtain government coverage. Credits will be terminated as of the first day of the second calendar month following the triggering event that resulted in eligibility (such as turning 65 for Medicare).^[18] The “reasonable promptness” provision does not apply to veteran’s health programs.
• provides that the Commissioner of the IRS may define eligibility for specific programs in further guidance. For example, the rule notes that further guidance will be provided for persons who may be eligible for Medicaid based on blindness or disability or on the need for long-term care services.^[19]

Premium Tax Credits and Employer-Sponsored Coverage

The ACA bars premium tax credits for employees with access to employer-sponsored health insurance coverage for individual or family coverage, unless coverage is determined to be not “affordable.” The ACA also provides that regardless of whether coverage is deemed “affordable,” premium tax credits are unavailable if an employee actually enrolls in the employer’s plan.^[20] The ACA thus essentially provides that an employee waives premium tax credit eligibility by enrolling in an employer plan, even if unaffordable.

The NPRM:

• provides that employees eligible for employer-sponsored coverage may not decline the coverage and seek enrollment in the Exchange with premium credits unless the coverage is unaffordable.^[21]
• provides that individuals eligible for continued coverage after involuntary separation from employment under the Consolidated Omnibus Budget Reconciliation Act (COBRA), or similar state or federal continuation of coverage, may elect to decline the continued coverage and qualify for premium tax credits. However, individuals who actually enroll in continuation coverage, however, are considered to have minimum essential coverage and are ineligible for premium tax credit assistance.^[22]
• specifies that affordability is to be defined only in relation to the cost of individual coverage, thereby rendering “affordable” family coverage that nonetheless significantly exceeds the 9.5 percent threshold, as long as coverage of the individual is considered affordable.^[23]
• establishes a “safe harbor” effectively preventing recoupment of premium tax credits during the reconciliation process for an individual whose employer-sponsored coverage was considered unaffordable at the time of enrollment (employee contribution exceeded 9.5 percent of household income), but whose income ultimately rose during the year, dropping the cost of the employer plan to 9.5 percent of household income or less.^[24]

Other Provisions

The NPRM:

• clarifies that for purposes of the premium tax credit, lawfully present aliens with incomes below 100 percent of FPL, who do not qualify for Medicaid because they do not yet meet the 5-year waiting period before Medicaid coverage begins, will be treated as individuals with incomes over 100 percent of FPL, thereby qualifying for premium tax credits, with the amount of the credit based on actual household income^[25].
• specifies that while incarcerated individuals are ineligible to enroll in a qualified health plan offered through an insurance Exchange or to receive premium credits toward the cost of enrollment, eligible family members may enroll and receive credits. The NPRM specifies that for purposes of determining eligibility for family members, Treasury will take into account the income, family size and tax filing status of incarcerated individuals.
• specifies that for purposes of determining the size of tax credits, Treasury will take into account undocumented family members (who are ineligible for enrollment in a QHP offered by an Exchange as well as for premium credits) in determining household size and income.^[26]
• clarifies that Veteran’s health programs authorized under chapter 17 or 18 of Title 38 U.S.C. will be treated as constituting minimum essential coverage only if the individual is enrolled in a veteran’s health care program that is actually identified as minimum essential coverage in regulation established under section 5000A.^[27]
• requires individuals receiving premium tax credits to file a tax return for that year.
• requires an Exchange to report for each taxpayer who receives premium credits the premium and category of coverage (e.g., self-only) for the applicable benchmark plan used to calculate the advance premium credits, the total premium for the coverage without regard to the advance credit, the aggregate amount of tax credits and cost sharing reductions received, and other information needed to connect the taxpayer to the receipt of the credits.