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IRS explains premium tax credit calculations for fiscal year individuals

Program Manager Technical Advice 2016-012

In Program Manager Technical Advice, IRS has set out how to make several of the calculations relevant to computing the Code Sec. 36B premium tax credit for fiscal year individuals.

Background. Code Sec. 36B(a) provides a premium tax credit to eligible taxpayers who enroll in a qualified health plan, or have a spouse or dependent enrolled in a qualified health plan, through a Marketplace. A taxpayer is generally only allowed a premium tax credit if his or her household income, as defined in Code Sec. 36B(d)(2) and Reg. § 1.36B-1(e), is at least 100% and not more than 400% of the Federal poverty line (FPL) for the taxpayer’s family size.

A taxpayer’s premium tax credit with respect to any coverage month is the lesser of: (a) the premiums for the plan or plans in which the taxpayer or one or more members of the taxpayer’s family enroll and (b) the excess of the premiums for the applicable second lowest cost silver plan covering the taxpayer’s family over the taxpayer’s contribution amount. (Code Sec. 36B(b)(2)) A taxpayer’s contribution amount is the product of the taxpayer’s household income and an “applicable percentage” that increases as the taxpayer’s household income increases, determined under rules specified in Code Sec. 36B(b)(3)(A)(i).Code Sec. 36B(b)(3)(A)(ii) provides that, for tax years beginning in 2015 and thereafter, the percentages in the table under Code Sec. 36B(b)(3)(A)(i) must be adjusted to reflect the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year. The applicable percentage within an income category increases on a sliding scale in a linear manner from the initial to final percentages.

For tax years beginning in 2014, a taxpayer’s applicable percentage ranges from 2.0% (the initial percentage) to 9.5% (the final percentage). For tax years beginning in 2015, the initial and final percentages are 2.01% and 9.56%, respectively, and for tax years beginning in 2016 the initial and final percentages are 2.03% and 9.66%, respectively. See Rev Proc 2014-37, 2014-2 CB 363, Sec. 5.01, and Rev Proc 2014-62, 2014-2 CB 948, Sec. 2.01.

Code Sec. 36B(c)(2)(B) provides that a coverage month does not include any month with respect to an individual if, for such month, the individual is eligible for minimum essential coverage other than eligibility for coverage in the individual market described in Code Sec. 5000A(f)(1)(C). Under Code Sec. 36B(c)(2)(C), an individual is not treated as eligible for employer-sponsored minimum essential coverage if the required contribution with respect to the plan exceeds 9.5% of the taxpayer’s household income (Code Sec. 36B required contribution percentage).

For plan years beginning in 2015 and thereafter, the 9.5% is updated in the same manner that the applicable percentage is adjusted under Code Sec. 36B(b)(3)(A)(ii). (Code Sec. 36B(c)(2)(C)(iv)) For plan years beginning in 2015, the required contribution percentage is 9.56, and for plan years beginning in 2016 the required contribution percentage is 9.66%. See Rev Proc 2014-37, Sec. 5.02 and Rev Proc 2014-62, Sec. 2.02.

Code Sec. 36B(f)(2) provides that, if a taxpayer’s advance credit payments are more than the premium tax credit the taxpayer is allowed (excess advance payments), the taxpayer must increase his or her tax liability by the excess advance payments, subject to a limitation for taxpayers with household income under 400% of the FPL for their family size. Under Code Sec. 36B(f)(2), for tax years beginning in 2014 and 2015, the repayment limitation ranges from $300 to $2,500. (Rev Proc 2014-61, 2014-47 IRB, Sec. 3.07) The repayment limitation ranges from $300 to $2,550 for tax years beginning in 2016. (Rev Proc 2015-53, 2015-44 IRB, Sec. 3.07)

Facts. Situation 1: Taxpayer A is an individual whose tax year is July 1 through June 30. A’s employer offers health insurance coverage to A. The employer’s health insurance plan year is the calendar year. A has never enrolled in the employer coverage. Instead, A enrolled in a qualified health plan through his Health Insurance Marketplace (Marketplace) for 2015 and 2016. A did not request advance payments of the premium tax credit (advance credit payments) for his Marketplace coverage.

Situation 2: Taxpayer B is also an individual whose tax year is July 1 through June 30. B is unmarried and uses the filing status of single. B’s employer does not offer health insurance coverage to B. B enrolled in a qualified health plan through his Marketplace for 2015 and 2016 and requested advance credit payments for his Marketplace coverage. For his tax year ending Jun. 30, 2016, B’s household income is at 310% of the FPL for a family size of one, and his advance credit payments exceed the premium tax credit B allowed by $1,400.

Issues. What is the applicable percentage and required contribution percentage to be used by a fiscal year taxpayer in determining his or her eligibility for and amount of the premium tax credit under Code Sec. 36B, and what is the limitation on excess advance payments of the premium tax credit a fiscal year filer should use?

IRS shows how to make fiscal year taxpayer calculations. IRS showed how the various premium tax credit calculations are made for fiscal year taxpayers, as follows:

Situation 1. In determining whether A is allowed a premium tax credit for his tax year ending June 30, 2016, A uses his household income for the tax year Jul. 1, 2015 through Jun. 30, 2016, to determine whether his household income is between 100% and 400% of the FPL for his family size. A uses the applicable percentage table that applies to tax years beginning in 2015 to determine his contribution amount for the tax year July 1, 2015 through June 30, 2016. For tax years beginning in 2015, the initial and final percentages are 2.01% and 9.56%, respectively.

In determining whether A was eligible for affordable employer-sponsored coverage for the tax year July 1, 2015 through June 30, 2016, A uses the following rules: For the months July through December of 2015, A compares his household income for the July 1, 2015 through June 30, 2016 tax year to the annualized amount that A would have been required to pay for self-only employer coverage for the period July 1 through Dec. 31, 2015. A then uses the required contribution percentage that applies to plan years beginning in 2015, 9.56%, to determine if the coverage is affordable for the months July 1, 2015 through Dec. 31, 2015. For example, assume A could have enrolled in self-only employer coverage for a cost of $250/month for the plan year Jan. 1, 2015 – Dec. 31, 2015. A’s cost for the period July 1 through Dec. 31, 2015 is $1,500. A’s annualized cost for the coverage is $3,000 ($1,500 x 12/6). If A’s $3,000 required contribution does not exceed 9.56% of A’s household income for the July 1, 2015 through June 30, 2016 tax year, A’s coverage is affordable for the months July through December 2015. However, if A’s $3,000 required contribution exceeds 9.56% of A’s household income for the July 1, 2015 through June 30, 2016 tax year, A’s coverage is not affordable for the months July through December 2015.

For the months Jan. 1, 2016 through June 30, 2016, A compares his household income for the July 1, 2015 through June 30, 2016 tax year to the annualized amount that A would have been required to pay for self-only employer coverage for the period Jan. 1, 2016 through June 30, 2016. A then uses the required contribution percentage that applies to plan years beginning in 2016, 9.66%, to determine if the coverage is affordable for the months January 2016 through June 2016. For example, assume A could have enrolled in self-only employer coverage for a cost of $260/month for the plan year Jan. 1, 2016 – Dec. 31, 2016. A’s cost for the period January through June 2016 is $1,560. A’s annualized cost for the coverage is $3,120 ($1,560 x 12/6). If A’s $3,120 required contribution does not exceed 9.66% of A’s household income for the July 1, 2015 through June 30, 2016 tax year, A’s coverage is affordable for the months January through June 2016. However, if A’s $3,120 required contribution exceeds 9.66% of A’s household income for the July 1, 2015 through June 30, 2016 tax year, A’s coverage is not affordable for the months January through June 2016.

Situation 2. In determining B’s tax liability for excess advance payments for the tax year ending June 30, 2016, B uses the repayment limitation in effect for tax years beginning in 2015, which is $1,250 for a taxpayer who uses the single filing status and has household income at 310% of the FPL. Thus, B’s tax liability for excess advance payments is $1,250 (i.e., the lesser of his excess advance payments of $1,400, and the applicable repayment limitation of $1,250(.

References: For the premium tax credit, see FTC 2d/FIN ¶  A-4241; United States Tax Reporter ¶  36B4; TaxDesk ¶  138,700; TG ¶  1381.