The IRS issued final regulations governing the Sec. 36B health insurance premium tax credit enacted by 2010’s health care legislation (T.D. 9590). They are scheduled to be published in the Federal Register on May 23. The final regulations provide guidance to individuals who enroll in qualified health plans through Affordable Insurance Exchanges and claim the premium tax credit, and to Exchanges that make qualified health plans available to individuals and employers.
The final regulations apply to tax years ending after Dec. 31, 2013. They adopt, with some modifications, proposed regulations issued in August 2011 (REG-131491-10).
The discussion below focuses on areas where the final regulations differ from or clarify the rules in the proposed regulations.
Taxpayer’s family: The final regulations clarify that a family may include all individuals not subject to the Sec. 5000A penalty and clarify that household income does not include the modified adjusted gross income of a family member who is required to file a tax return solely to report tax imposed under Code sections other than Sec. 1. (Sec. 5000A requires individuals to maintain minimum essential coverage.)
Modified adjusted gross income: The final regulations amend the definition of modified adjusted gross income to include Social Security benefits. This is consistent with a change in the definition of modified adjusted gross income enacted as part of the 3% Withholding Repeal and Job Creation Act, P.L. 112-56.
Federal poverty line: The final regulations clarify that, if married taxpayers reside in separate states with different federal poverty guidelines, or if a taxpayer resides in states with different federal poverty guidelines during the year, the federal poverty line that applies for purposes of Sec. 36B and the associated regulations is the higher federal poverty line (resulting in a lower percentage of the federal poverty line for the taxpayers’ household income and family size).
Rating area: The final regulations reserve the definition of rating area.
Incarceration: The final regulations state than an individual who is incarcerated may be allowed a premium tax credit if a family member is enrolled in a qualified health plan.
Minimum essential coverage: Under the final regulations, an individual who fails to complete the requirements necessary to receive benefits available under a government-sponsored program by the last day of the third full calendar month following the event that establishes eligibility is treated as eligible for the coverage on the first day of the fourth calendar month.
Definition of eligible: Individuals who are eligible to receive health care from the Indian Health Service (IHS) will not be barred by IHS access alone from eligibility for the premium tax credit or from access to the special cost-sharing reduction for tribal members under Section 1402(d) of the Patient Protection and Affordable Care Act, P.L. 111-148.
Affordability: The proposed regulations provided that an eligible employer-sponsored plan is affordable if the portion of the annual premium an employee must pay for self-only coverage does not exceed the required contribution percentage. Commentators suggested that this percentage should be based on family—not self-only—coverage. The final regulations do not contain the rule from the proposed regulations, and the IRS says it will provide rules for determining affordability in future regulations.
Affordability safe harbor: The final regulations provide that the affordability safe harbor does not apply if a taxpayer, with reckless disregard for the facts, provides incorrect information to an Exchange concerning an employee’s portion of the annual premium for employer coverage. The final regulations clarify that the affordability safe harbor applies only until such time as the availability of employer-sponsored coverage changes. The final regulations also clarify that the affordability safe harbor does not carry over to later plan years automatically as part of the redetermination process.
Waiting period: The final regulations clarify that an employee or related individual is treated as not eligible for coverage under the employer’s plan during a waiting period.
Minimum value: Notice 2012-31 solicited additional comments on potential approaches for determining minimum value, and separate guidance will be issued.
Individuals enrolled in coverage: The final regulations clarify that an individual is treated as eligible for minimum essential coverage under an eligible employer-sponsored plan by reason of enrolling in the plan or in continuation coverage only for months the individual is enrolled in the coverage.
The final regulations provide that an employee or related individual is treated as not enrolled in an eligible employer-sponsored plan for a month in a plan year or other period if the employee or related individual is automatically enrolled in the plan for that plan year or other period and terminates that coverage before the later of the first day of the second full calendar month of the plan year or other period or the last day of any permissible opt-out period provided by the employer-sponsored plan or in regulations to be issued by the Labor Department.
Nondependent eligibility for minimum essential coverage: The final regulations provide that an individual who may enroll in minimum essential coverage because of a relationship to another person eligible for the coverage, but for whom the other eligible person does not claim a personal exemption deduction under Sec. 151, is treated as eligible for minimum essential coverage under the coverage only for months that the related individual is enrolled in the coverage.
This change reflects the fact that the related individual is a member of a different family with different household income for purposes of the premium tax credit. Furthermore, a person who may not claim a related individual as a dependent is not responsible for the Sec. 5000A penalty for the related individual who does not receive coverage. Thus, the final regulations ensure that coverage available through another person does not create an obstacle to a related individual claiming a premium tax credit.
Computing the premium tax credit
Coverage month: The final regulations provide that an individual must be enrolled in a qualified health plan as of the first day of the month for a month to be a coverage month. However, instead of testing whether the individual is eligible for other minimum essential coverage as of the first day of the month, the final regulations provide that an individual may have a coverage month as long as there is at least one day of the month when the individual is not eligible for other minimum essential coverage. The final regulations also clarify that a month is not a coverage month for a taxpayer if the taxpayer’s share of premiums is not paid in full by the unextended due date for filing the taxpayer’s income tax return for the tax year.
Third-party payments: The final regulations add an example illustrating that premiums paid for a taxpayer by an Indian tribe are treated as paid by the taxpayer under the coverage month rule.
Adjusted monthly premium: The final regulations revise the definition of adjusted monthly premium to clarify that the adjusted monthly premium is determined without regard to any premium discount or rebate under a wellness discount demonstration project and to clarify that the premium may not be adjusted for tobacco use.
Applicable benchmark plan: The final regulations provide that the applicable benchmark plan for family coverage is the plan that applies to the members of the taxpayer’s coverage family.
Families not covered by one applicable benchmark plan: The final regulations provide that, if there is at least one silver level plan offered on an Exchange that does not cover all members of a taxpayer’s coverage family under one policy and premium (for example, because of nontraditional relationships within the family), the premium for the applicable benchmark plan is the single premium or the combination of premiums that is the second lowest cost silver option for covering the entire family. The final regulations reserve rules for determining the applicable benchmark plan for families with members residing in different locations.
Plans closed to enrollment: The final regulations clarify that a plan is taken into account in determining the taxpayer’s applicable benchmark plan only if it is open to enrollment to one or more members of a taxpayer’s coverage family.
Pediatric dental coverage: The final regulations provide that the portion of the premium for a stand-alone dental plan properly allocable to pediatric dental benefits is determined under guidance issued by the Department of Health and Human Services.
Reconciling the credit and advance credit payments
Months for which an issuer does not provide coverage: The final regulations clarify that a taxpayer does not have an advance credit payment for a month in which the issuer of the qualified health plan does not provide coverage and will not be required to reconcile payments for those months. The taxpayer will, however, have to reconcile the payment for the first month of the grace period. If the taxpayer has not paid his or her share of the premium for that month by the unextended due date for filing the return, the first month is not a coverage month, and the taxpayer is not eligible for the premium tax credit for that month.
Changes in circumstances: The IRS says in the preamble to the regulations that it will consider possible avenues of administrative relief in appropriate cases for taxpayers who have additional tax liability as a result of excess advance payments, but it does not resolve the issue in the regulations themselves.
Changes in filing status: The final regulations adopt an alternative credit computation suggested by commentators to the proposed regulations as an option for taxpayers who marry during the tax year.
The IRS also says that it intends to propose additional regulations regarding eligibility for the premium tax credit to address circumstances in which domestic abuse, abandonment, or similar circumstances create obstacles to the ability of taxpayers to file joint returns.
Information reporting: The final regulations defer rules on the time for information reporting by Exchanges to additional regulations, which are expected to provide for monthly reporting by Exchanges to the IRS and an annual report to the IRS and the taxpayer due by Jan. 31.
—Alistair M. Nevius (
) is the JofA’s editor-in-chief, tax.