Reform Alert - News from the Blues' Office of National Health Reform

IRS issues final rule regarding premium tax credits for the Exchange

Update: Oct. 17, 2013 — Understanding the advanced premium tax credit

July 31, 2012

The Internal Revenue Service has released guidelines detailing the tax credit eligibility for individuals who enroll in qualified health plans through individual market exchanges. Though these are "final regulations," the IRS promises additional guidance for several components under the premium tax credit regulations.

This regulation discusses:

  • Eligibility determinations for the premium tax credit 
  • Calculation of premium tax credit amounts 
  • Reconciliation process between advanced premium tax credits received and final tax credit determinations 

Who is eligible for this individual premium tax credit?

The following criteria apply for determining if a taxpayer is eligible for an individual market premium tax credit:

  • In general, household income must be between 100 percent and 400 percent of the Federal Poverty Level. 
  • Cannot have access to minimum essential coverage, other than individual market coverage: 
    • Minimum essential coverage is defined as any coverage in the individual, small group or large group markets, Medicare, Medicaid, CHIP, TRICARE, veterans' health care and Peace Corps coverage, and any other coverage the Departments of Health and Human Services and IRS deem minimum essential coverage in future regulations. 
    • There is an exception to this rule if coverage offered by an employer either does not meet a minimum value test (at least 60 percent actuarial value) or an affordability test (the employee share of the premium for self-only coverage cannot exceed 9.5 percent of household income). 
  • Credit only applies to coverage months for an individual market QHP purchased through an Affordable Care Act Exchange. 
  • Married couples must file a joint tax return. 
  • Those receiving advance premium tax credits are required to file a tax return for the taxable year in which the advanced payment is received. 
  • Must be a legal resident. 
  • Cannot be incarcerated. 
  • An individual cannot be an "applicable taxpayer" if the individual can be claimed as a dependent by another taxpayer 
  • Taxpayer's share of the premium for the coverage month must be paid in full by the taxpayer's tax filing date. 

What is the value of a premium tax credit?

The value of the premium tax credit is a function of the following values as they apply to the taxpayer: benchmark premium, household income, the "applicable percentage," and the premium cost of the selected QHP (applicable in certain circumstances).

The value of the premium tax credit is the minimum of:

  • The cost of the selected QHP 

– or – 

  • (adjusted monthly benchmark premiumi) – ((household incomeii * applicable percentage)/12iii). 

Tax credit amounts are determined based on annual income calculations, but the actual credit amount is determined and distributed on a monthly basis.

How does an individual receive the tax credit?

After an individual's eligibility has been determined, an Exchange customer may elect to receive the tax credit in advance. The customer can receive the amount the Exchange has approved or can choose to receive a lower amount. For example, if the Exchange estimates eligibility of $1,000, the customer could accept the $1,000 in advance (divvied up on a monthly basis). Or the customer could choose a smaller amount, such as $800.

Does an individual receive the credit directly?

No. The monthly advance credit payment is remitted from the IRS to the QHP issuer. Then, the QHP issuer charges the customer the balance of the monthly premium.

How has the IRS said that the premium tax credits are reconciled?

As noted above, those who receive a premium tax credit will have to file a tax return and reconcile any advance payment of tax credits with actual tax credit eligibility.

Married taxpayers are required to file a joint tax return in order to be eligible for the premium tax credit. There is an exception if one spouse is properly filing as the "head of the household" and the other spouse files as married filing separately.

Will the IRS provide further guidance on other special rules for taxpayers filing joint returns?

The IRS is considering special rules to address circumstances in which domestic abuse, abandonment, or similar circumstances create obstacles for taxpayers trying to file joint returns. The IRS is seeking comments regarding required documentation, the credit calculation processes under these situations, and anti-abuse rules.

What if marital or income status changes?

If a taxpayer's household income is higher than anticipated, or if tax or family status changes in a way that reduces the value of the premium tax credit from what was anticipated, the actual value of the premium tax credit may be less than what was received in advance.

In this situation, the taxpayer will face an increased tax liability (through a reduced tax refund or an increased tax payment). In the final rule, the IRS has significantly changed the manner in which marriage during a taxable year is considered for purposes of reconciliation, diminishing the likelihood of a "marriage penalty" with respect to this tax credit.

If a taxpayer's income for a taxable year is less than 400% FPL, then under current federal guidance, any increased tax liability is capped according to the follow table:

Household income % of FPL Limitation for unmarried individuals Limitation for other taxpayers
Less than 200% $300 $600
At least 200% but less than 300% $750 $1,500
At least 300% but less than 400% $1,250 $2,500

If household income decreases or tax or family status changes in a way that increases the value of the premium tax credit relative to what was received in advance, then the taxpayer's tax liability will decrease (through an increased tax refund or decreased tax payment).

How are premium tax credits distributed among family members?

Premium tax credits only apply to those individuals in a family that are eligible for the tax credits. If a family purchases family coverage on an Exchange, but not all members of the family are eligible for premium tax credits, then the benchmark premium is determined relative to the number of family members who are eligible. Then, only the cost of premiums allocable to those family members can receive a subsidy.

Does COBRA need to be exhausted?

The IRS clarifies that taxpayers do not need to exhaust COBRA or any other continuation coverage before securing eligibility for premium tax credits.

Where can I find more information?

For more information, please visit the Federal Register, 26 CFR Parts 1 and 602 (PDF).

i The benchmark premium is the adjusted monthly premium for the benchmark plan. The benchmark plan is the second- lowest-cost silver plan offered through the Exchange in the rating area where the taxpayer resides. The adjusted monthly premium is the premium the issuer would charge for the applicable benchmark plan to cover all members of the taxpayer's family, adjusted for geography and the age of each member of the family. The benchmark is not adjusted for tobacco use or wellness discounts.

ii Household income generally includes the modified adjusted gross income of all individuals included in the family size determination who are required to file a tax return.

iii The tax credit is designed such that qualifying taxpayers do not pay more for their health insurance premiums than a certain percentage of their household income. This "applicable percentage" is determined based on the taxpayer's household income relative to the applicable federal poverty line. The applicable percentage. The applicable percentage increases as income as a percentage of FPL increases, ranging from 2% to 9.5% of household income.

The information on this website is based on BCBSM's review of the national health care reform legislation and is not intended to impart legal advice. Interpretations of the reform legislation vary, and efforts will be made to present and update accurate information. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. Analysis is ongoing and additional guidance is also anticipated from the Department of Health and Human Services. Additionally, some reform regulations may differ for particular members enrolled in certain programs such as the Federal Employee Program, and those members are encouraged to consult with their benefit administrators for specific details.

As required by IRS Circular 230, unless expressly stated otherwise, if this message contains any tax advice concerning one or more Federal tax issues, it is not a formal legal opinion and cannot be used by any person to avoid Federal tax penalties, and cannot be quoted or referenced to promote or market to another party any transaction or matter addressed in this communication.