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Implementing Health Reform: IRS Releases Premium Tax Credit Rules And Draft Forms



July 25th, 2014

Although the focus of activity the week of July 21 was in the courts, the agencies were not totally silent. On July 24, 2014 the Internal Revenue Service released final and temporary  and proposed regulations addressing issues that are presented by the premium tax credit program. The IRS also released drafts of the forms that individuals, insurers, and employers will use for reporting information to the IRS necessary for reconciliation of premium tax credits and for the enforcement of the individual and employer mandate programs. Finally, the IRS set the maximum individual mandate penalty for individuals whose income is high enough that they pay the penalty as a percentage of income rather than a flat dollar amount. This amount is established by the statute as the average cost of a bronze level plan for the applicable family size for 2014 and was set by the IRS at $2,448 per individual annually, up to $12,240 for families of five or more.

The draft forms operationalize the reporting requirements established by rules published earlier. Insurers and self-insured health plans will provide a Form 1095-B to each of their enrollees and members, and file these forms, together with a transmittal form 1094-B with the IRS. Large employers must provide a form 1095-C to each employee, and transmit these, together with a transmittal form 1095-B to the IRS. Exchanges will provide their enrollees a form 1095-A. Individuals who receive premium tax credits will file a form 8962 with the IRS, while individuals claiming an exemption from the individual mandate will file a form 8965. Though the forms are not accompanied by instructions, they are quite straightforward and track closely the earlier released rules.

The final and temporary rules address several situations that will arise under the premium tax credit program that have not yet been addressed by the premium tax credit rules. The temporary rules are identical to the proposed rules and will cease to apply once the proposed rules are finalized.

Domestic abuse and abandonment. Several of the rules address complex family situations. The ACA requires married couples to file a joint return as a condition of receiving premium tax credits. This is often not possible, however, if one of the spouses is a victim of domestic violence or has been abandoned by the other spouse, who cannot be located. Following up on guidance released earlier this year, the temporary and proposed regulations would allow married victims of domestic abuse to claim a premium tax credit without filing a joint return if the taxpayer files a married-filing-separately tax return and the taxpayer (i) is living apart from his or her spouse at the time of filing the return, (ii) is unable to file a joint return because of the domestic violence situation, and (iii) indicates on his or her return that this is the case.

The temporary regulations also allow victims of spousal abandonment to file separately. In these situations the individual may file as married filing separately and not have an excess advance tax credit payment. Individuals cannot quality for relief from the joint filing requirement for more than three consecutive years, during which time they must presumably obtain a divorce.

Domestic violence is defined to include “physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim’s ability to reason independently,” and is determined considering all facts and circumstances. An individual qualifies as a victim of spousal abandonment if the individual is abandoned by his or her spouse and is unable to locate his or her spouse after reasonable diligence.

Allocating premium tax credits between parents and other allocation issues. The regulations also address how taxpayers should compute their premium tax credits and reconcile advance premium tax credits in situations where a family member (the shifting enrollee, usually a child) is enrolled in a health plan by one taxpayer (the enrolling taxpayer, usually a parent) who receives an advance premium tax credit for the family member, but the shifting enrollee is ultimately claimed as a dependent for tax purposes by another taxpayer (the claiming taxpayer; the other parent). In this situation the two taxpayers must allocate the amount of the premium that each must take into account in determining his or her tax credit, the amount of the advance premium tax credit received by the enrolling taxpayer that the claiming taxpayer must reconcile for the shifting enrollee’s coverage, and the adjusted monthly premium for the applicable benchmark plan that must be used for determining the allocation of advance premium tax credits.

Under the rule, the enrolling and claiming taxpayers are permitted to agree among themselves how to allocate these items, as long as the same allocation percentage is applied to each. If they cannot agree, the percentage applied is equal to the number of shifting enrollees claimed as a personal exemption deduction by the claiming taxpayer divided by the number of individuals enrolled by the enrolling taxpayer in the same qualified health plan as the shifting enrollee. The rule describes how these allocation percentages are applied for determining and allocating tax credits and for reconciliation purposes, with the allocable portion generally attributed to the claiming taxpayer and the remainder to the enrolling taxpayer.

The rules also address how taxpayers who were both enrolled in the same qualified health plan but legally separate or divorce during a year should allocate the benchmark plan premium, the premium for the plan in which the taxpayers or their dependents enroll, and the advance credit payments to compute their respective premium tax credits and excess advance credit payments for that year. Again, they may decide to use any allocation percentage as long as it is applied across the board, with the default percentage set at 50 percent. If the plan covers a time period during which only one taxpayer or his or her dependents was enrolled in the plan, then the benchmark plan premium, premium, and the advance tax credit payments for that period are allocated entirely to that taxpayer. The rules also address allocation issues where a married couple lives separately for more than six months and the members file separately using head of household status.

Indexing consumer payment responsibility amounts. The temporary and proposed regulations also address the issue of indexing the applicable percentages that are used for determining the amount that an individual receiving a premium tax credit must pay before the tax credit kicks in. The ACA provides that the portion of the premium an individual must pay is determined by multiplying the person’s household income times an “applicable percentage,” which increases as income increases (from 2 percent of income below 133 percent of the poverty level to 9.5 percent over 300 percent of poverty).

The ACA requires the applicable percentage to be indexed so that, as health insurance premiums rise relative to income, the percentage will rise as well, leaving the individual and the federal government responsible for a roughly proportionate share of the cost of the premiums over time. The “affordability percentage,” (currently 9.5 percent) which is multiplied times household income to determine whether an offer of employer coverage is affordable, thus making the employee and family ineligible for premium tax credits, will be adjusted by the same index amount.

Beginning in 2015, the applicable percentages and affordability percent are increased to reflect the excess of the rate of premium growth over the rate of income growth in the preceding calendar year. The approach that the IRS will use to determine these growth rates is set out in guidance also released on July 24; it is the same approach as the IRS is using to index the individual mandate affordability requirement percentage.

Premium growth for the preceding calendar year is defined as the projected growth in per enrollee spending for employer-sponsored private health insurance for the preceding calendar year divided by the projected per enrollee spending for employer-sponsored private health insurance for the calendar year two years prior. Income growth for the preceding calendar year will be the projected growth in GDP per capita for the preceding calendar year divided by the projected GDP per capita for the calendar year two years prior. The IRS will adjust the applicable percentage and the affordability percentage by the ratio of premium growth to income growth. The index rates will also be adjusted over time as projected data is updated with actual data.

The interaction between the premium tax credit rules and the rules governing the deduction of health insurance costs for self-employed individuals. A self-employed taxpayer may both collect a premium tax credit (if eligible) and claim a deduction in computing gross income for the amount of the premium that the taxpayer has paid for covering the taxpayer, the taxpayer’s spouse, and enrolled family members that is not covered by the advance premium tax credit. The taxpayer can also claim as a deduction any advance premium tax credit amounts that must be paid back at reconciliation.

But the amount of the premium tax credit is dependent on the taxpayer’s gross income. Moreover, the amounts of excess advance tax credits that must be paid back are subject to limits that depend on the gross income of the taxpayer. This creates a circularity problem, as the deduction is applied before gross income is calculated. Both the temporary regulation and a guidance published in tandem with it describe how to resolve this circularity problem, but are far too complicated to describe here.

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5 Responses to “Implementing Health Reform: IRS Releases Premium Tax Credit Rules And Draft Forms”

  1. timothy jost Says:

    In response to John, the percentages for 2015 are published in Revenue Procedure 2014-37, available here. http://www.irs.gov/file_source/pub/irs-drop/rp-14-37.pdf I believe that an insurer’s responsibility for provider payment under coverage not purchased with premium tax credit assistance would be governed by state law.

  2. John Says:

    “Beginning in 2015, the applicable percentages and affordability percent are increased to reflect the excess of the rate of premium growth over the rate of income growth in the preceding calendar year.”

    When will those percentages be published? Before people start signing up in November 2014?

  3. timothy jost Says:

    Both Nick and Robert’s comments illustrate the complexity of using premium tax credits to pay for private health insurance. If I understand the situation Nick is describing, my understanding is that a U.S. taxpayer would not qualify for premium tax credits while living abroad because one eligibility requirement is residing in a state, as the exchanges (federally facilitated or state) operate only within states.

  4. nick Says:

    Has there been any guidance or proposed rule yet with regard to married couples with one spouse being a foreigner and living abroad? This is a situation where the U.S. spouse who would otherwise qualify for premium tax credits is unable to apply, because it is impossible to enter a foreign address in the federal application. And this does not even address the issue of having to file a joint tax return when the spouse is subject to foreign taxes and is paying into a foreign health insurance system.

  5. Robert Says:

    Unfortunately, the regulation and guidance don’t resolve the circularity, which has the form of “This statement (pointing to itself) is false.” Assume a couple, both age 55 with self-employment income of $70,000 (after deducting 1/2 of the self-employment tax). Suppose they pay $15,000 out of pocket for a policy thru an exchange, and that the cutoff for subsidies = 4x poverty line = $62,040 of “Modified AGI”, which means income after deducting health insurance costs. Question: do they qualify for a subsidy?

    $70K – $15K = $55,000, which is below 4x poverty. They need pay only 9.5% of income, so get a subsidy of $15K – $5,225 = $9,775. But the law says they can’t deduct the portion of insurance cost equal to the subsidy. So now the health insurance deduction is $5,225 and MAGI is $64,775, which is above the cutoff point for getting any subsidy. Result: if they qualify for a subsidy, they don’t qualify, and if they don’t qualify, then they do.

    It will probably affect only a few folks, but it illustrates the problems caused when trying to cure a diseased medical finance system by joining.it to a dysfunctional income tax code.

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