The Internal Revenue Service (IRS) has issued proposed regulations relating to the health insurance premium tax credit enacted by the Affordable Care Act. The tax credit is designed to reduce certain individuals' out-of-pocket premium costs for enrolling in qualified health plans through Affordable Insurance Exchanges, state-based competitive marketplaces where individuals and small businesses will be able to purchase private health insurance beginning in 2014.

Who is eligible for the health insurance premium tax credit? 

The proposed regulations provide that a taxpayer is generally eligible for the credit for a taxable year if:

  • The taxpayer's household income for the year is between 100% and 400% of the federal poverty level;
  • The taxpayer or a member of the taxpayer's family is enrolled in one or more qualified health plans through an Affordable Insurance Exchange; and
  • The taxpayer or a member of the taxpayer's family is not eligible for other qualifying coverage (called "minimum essential coverage"), such as Medicare, Medicaid, or affordable employer-sponsored coverage.

What is considered employer-sponsored "minimum essential coverage"? 

An individual generally is eligible for employer-sponsored minimum essential coverage only if the employee's share of the premiums is affordable and the coverage provides minimum value.

  • For both employees and others (such as spouses or dependents) who are eligible to enroll in employer-sponsored coverage by reason of their relationship to an employee, the coverage is unaffordable if the required contribution for "self-only" coverage (as opposed to family coverage) exceeds 9.5% of household income.
  • An eligible employer-sponsored plan generally provides minimum value if the plan's share of the total allowed costs of benefits provided under the plan is at least 60% of those costs.

What is the amount of the credit? 

Under the proposed rules, the credit amount is generally equal to the difference between the premium for the "benchmark plan" and the taxpayer's "expected contribution."

  • The benchmark plan is the second-lowest-cost plan that would cover the family at the "silver" level of coverage offered through an Exchange.
  • The expected contribution is a specified percentage of the taxpayer's household income.
    • The percentage increases as income increases, from 2% of income for families at 100% of the federal poverty level (FPL) to 9.5% of income for families at 400% of FPL. (The actual amount a family pays for coverage will be less than the expected contribution if the family chooses a plan that is less expensive than the benchmark plan.)
  • The credit is capped at the premium for the plan the family chooses (so no one receives a credit that is larger than the amount they actually pay for their plan).

What does it mean that the credit is "advanceable"? 

An Exchange makes an advance determination of credit eligibility for individuals enrolling in coverage through the Exchange and seeking financial assistance. Using information available at the time of enrollment, the Exchange determines whether the individual meets the income and other requirements for advance credit payments and the amount of the advance payments. Advance payments are made monthly directly to the insurance company issuing the qualified health plan in which the individual or family enrolls.

  • The advance payments are then reconciled against the amount of the family's actual premium tax credit, as calculated on the family's federal income tax return.
  • Any repayment due from the taxpayer is subject to a cap for taxpayers with incomes under 400% of FPL.

Is there a penalty for employers who do not offer affordable health coverage? 

Under the Affordable Care Act, beginning in 2014, employers with 50 or more full-time employees that do not offer affordable health coverage to their full-time employees may be required to make a "shared responsibility payment" if any of the employer's full-time employees obtains coverage through an Exchange and receives a premium tax credit or cost-sharing reduction because the employer-sponsored coverage does not provide minimum value or is unaffordable to the employee. 

According to the proposed rules, future proposed regulations are expected to provide an affordability safe harbor for employers (based on an employee's W-2 wages from the employer) who meet certain requirements, including offering their full-time employees and their dependents the opportunity to enroll in eligible employer-sponsored coverage. This anticipated safe harbor would respond to concerns from employers that they will not know their employees' actual household income.

Where can I find additional information on the health insurance premium tax credit?  

To read more about the health insurance premium tax credit, please click on the links below. The HR360 Health Care Reform section contains additional information on requirements for employers under the Affordable Care Act.

Topics: Employee Benefits, Health Care Reform

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