Treasury Department And IRS Issue Final Regulations Implementing Affordable Care Act's Health Insurance Premium Tax Credit

Commencing in 2014, the Patient Protection and Affordable Care Act (the Act) provides individuals and small businesses with the ability to purchase health insurance through state-based insurance exchanges or marketplaces. To help low-income individuals and families purchase coverage, the Act makes available refundable premium tax credits. The Act's premium tax credit provisions are set out in newly added Internal Revenue Code § 36B. The Treasury Department and IRS recently issued a final regulation implementing the Act's premium tax credits features.

Background

Beginning in 2014, the Act requires most U.S. citizens and green card holders to maintain health insurance that qualifies as "minimum essential coverage." Individuals who fail to maintain minimum essential coverage, and who are not otherwise exempt, are subject to a penalty for noncompliance. Minimum essential coverage includes eligible employer coverage, individual coverage, grandfathered plans, and federal programs such as Medicare and Medicaid, among others.

The Act enables and supports the creation by the states of "American Health Benefit Exchanges" (alternatively, "state-bases exchanges," or simply, "exchanges") the purpose of which is to provide eligible individuals and small businesses with access to quality, affordable health care coverage under Qualified Health Plans (QHPs). A QHP is an individual or small group health policy that provides minimum essential coverage, is issued by a state-licensed carrier, and satisfies certain other cost-sharing requirements. Carriers offering QHPs through state-based insurance exchanges must offer four levels of coverage (bronze, silver, gold, and platinum) based on the portion of costs paid by the plan. (For example, a silver plan will pay, on average, 70% of the costs, with the remaining 30% being paid by the covered individual in the form of co-pays, deductibles, co-insurance, and other cost-sharing.) To facilitate the purchase of affordable health insurance coverage, the Act makes available premium assistance tax credits to individuals with incomes up to 400% of the Federal Poverty Level (FPL). Individuals seeking premium assistance tax credits must submit an application to the state-based insurance exchange in the coverage area in which they reside. The exchange determines whether the individual meets the income and other requirements for advance credit payments and the amount of such payments. Premium tax credits may only be used to purchase QHP coverage through a state-based exchange. Premium assistance credits are advanceable and refundable. An advanceable credit is paid directly to the carrier immediately upon the purchase of coverage. A refundable credit is one that is available even if a taxpayer has no other tax liability. The recipient of the tax credit pays the balance. Thus, the recipient is not required to pay the premium tax credit out of pocket then await reimbursement when filing his or her annual income tax return or through some other mechanism.

Eligibility

To be eligible for a premium tax credit, an individual must be an "applicable taxpayer." Code § 38B defines the term "applicable taxpayer" to mean a taxpayer —

With household income for the taxable year between 100% and 400% percent of the FPL for the taxpayer's family size; Who may not be claimed as a dependent by another taxpayer, and Who files a joint return if married. An individual who is not lawfully present in the US or who is incarcerated is not an applicable taxpayer, but he or she may be treated as such if a family member is eligible to enroll in a qualified health plan. A lawfully present alien whose household income is 100% FPL or less, and who is not eligible for Medicaid, is treated as an...