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IRS Issues Guidance on Claiming 2014 and 2015 Health Coverage Tax Credit

IRS has provided guidance on claiming the health coverage tax credit (HCTC) for tax years 2014 and 2015, with particular emphasis on circumstances in which the taxpayer qualifies for both the HCTC and the Code Sec. 36B premium tax credit (PTC). ( Notice 2016-2, 2016-2 IRB )

Background—HCTC. The HCTC helps certain trade-affected workers, retirees, and their families pay their health insurance premiums. Code Sec. 35(a) provides that the HCTC is 72.5% of the amount paid by an eligible individual for qualified health coverage of the individual and qualifying family members for eligible coverage months.

Code Sec. 35(b) provides that an individual has an eligible coverage month if, as of the first day of the month, the taxpayer: (1) is an eligible individual, (2) is covered by qualified health coverage, the premium for which is paid by the taxpayer, (3) does not have other specified coverage, and (4) is not imprisoned under federal, state, or local authority.

Qualifying family members are the eligible individual’s spouse, and any person the eligible individual can claim as a dependent on the eligible individual’s federal income tax return. (Code Sec. 35(d))

One category of qualified health coverage is individual health insurance from a qualified health plan (QHP) offered through an Affordable Care Act Marketplace, for coverage months in 2014 and 2015 tax years. (Code Sec. 35(e)(1)(J) as amended by Sec. 407(d)(2) of the Trade Preferences Extension Act of 2015 (the “TPE Act,” P.L. 114-27)

The TPE Act also extended the HCTC, which was originally scheduled to expire after 2013, and provided new rules for electing the HCTC. Under Code Sec. 35(g)(11), for coverage months in tax years beginning after December 31, 2013, an eligible individual must make an election to claim the HCTC. The election, once made for a month, applies to all later coverage months in the tax year for which the taxpayer is eligible to take the HCTC, and is irrevocable for all such coverage months. In general, the election must be made by the due date of the tax return (including extensions) for the applicable tax year. However, an HCTC election may be made within the 3-year limitation period prescribed in Code Sec. 6511(a) (generally, three years from the date a return is filed) for a tax year beginning after December 31, 2013 and before June 29, 2015. (TPE Act Sec. 407(b))

Notice 2005-50, 2005-2 CB 14, provides guidance on various HCTC subjects (see Pension and Benefits Week ¶  1  6/27/2005).

Background—PTC. Code Sec. 36B allows a PTC to applicable taxpayers to help individuals and families afford the cost of premiums for QHPs purchased through the Marketplace. In general, an individual is an applicable taxpayer if (a) the individual’s household income is at least 100%, but not more than 400%, of the federal poverty line for the individual’s family size, (b) no one can claim the individual as a dependent, and (c) if married, the individual files a joint return.

Eligible individuals and families can choose to have advance credit payments paid directly to their insurance company to lower what they pay out-of-pocket for their monthly premiums. These advance payments are referred to as the “advance premium tax credit” (APTC).

Where the advance payments paid to a taxpayer’s insurer for the tax year exceed the PTC to which the taxpayer is actually entitled for the tax year, the taxpayer generally owes the excess advance payments as an additional income tax liability. (Code Sec. 36B(f)(2)(A)) However, Code Sec. 36B(f)(2)(B) limits that additional tax for a taxpayer whose household income is less than 400% of the federal poverty line for a family of the size involved.

New guidance. Notice 2016-2 provides guidance on claiming the HCTC for tax years 2014 and 2015, with particular emphasis on circumstances in which the taxpayer qualifies for both the HCTC and the PTC.

Where taxpayer qualifies for both the HCTC and the PTC. For months in tax years beginning in 2014 or 2015, an individual enrolled in a QHP who is both an eligible individual for purposes of the HCTC, and eligible for the PTC in a month, may claim either the HCTC or the PTC for the month.

Once the HCTC election is made for an eligible coverage month, the individual is ineligible to claim the PTC for the same coverage in that coverage month and for all later months in the tax year for which the individual is eligible for the HCTC. Thus, for example, if for every month of 2014 a taxpayer was enrolled in coverage through the Marketplace and was HCTC-eligible, the taxpayer might elect the HCTC beginning in July. The election would apply to coverage for July through December, and the taxpayer could only claim the PTC for coverage for January through June. If the taxpayer’s HCTC eligibility instead ended in August, the election would apply for coverage for July and August only, and the taxpayer could claim the PTC for coverage for September through December, as well as for January through June.

While the HCTC election prevents a taxpayer from claiming both the PTC and the HCTC for the same month for the same coverage, a taxpayer may claim the PTC and the HCTC in the same month for different coverage. For example, if a taxpayer elects the HCTC for self-only coverage for a month, the taxpayer may claim the PTC for Marketplace coverage of the taxpayer’s family members for that same month, if that coverage is otherwise eligible for the PTC.

A unique situation arises if qualifying health coverage covers individuals eligible for the HCTC, in addition to other individuals for whom the HCTC is not elected.Notice 2005-50, Q&A 3 provides that, for purposes of the HCTC, if qualifying health coverage covers eligible individuals, qualifying family members, and individuals who are neither eligible individuals nor qualifying family members (nonqualifying beneficiaries), then qualifying health coverage premiums are allocated on an incremental basis, attributing amounts first to the eligible individuals and qualifying family members, before allocating amounts to nonqualifying beneficiaries.Code Sec. 36B and its accompanying regs, issued after Notice 2005-50 was issued, include special rules for allocating premium amounts when a QHP covers individuals in more than one tax family. See Reg. § 1.36B-3(h) (see Pension and Benefits Week ¶  1  8/4/2014).

For simplicity, to determine the allowable HCTC, taxpayers should apply the rules under Code Sec. 36B to allocate premium amounts and APTC among tax families, instead of the rule described in Q&A 3 of Notice 2005-50. Thus, if the individuals enrolled in a QHP belong to different tax families, one family may claim the HCTC for the HCTC-eligible individuals in the plan, and the other family may claim the PTC for the other individuals enrolled in the plan, and each family determines their portion of the enrollment premiums and APTC using the allocation rules provided under Code Sec. 36B.Notice 2005-50 is modified to the extent its rules are inconsistent with this rule under Notice 2016-2.

In general, a taxpayer with APTC in excess of allowable PTC must repay the difference as additional tax. Although the amount of additional tax that must be repaid may be limited by Code Sec. 36B(f)(2), the repayment limitations in Code Sec. 36B(f)(2) do not apply to coverage for 2014 or 2015 if the taxpayer elects the HCTC for any month in that year for that coverage. Thus, a taxpayer who elects the HCTC for coverage in 2014 or 2015 and who received the benefit of APTC for that coverage must repay all APTC in excess of allowable PTC.

Other guidance contained in the Notice. The Notice sets out guidance for claiming the credit for 2014. A calendar year taxpayer who filed his 2014 return on April 15, 2015, must claim the HCTC for 2014 by filing an amended 2014 return by April 17, 2018 (an extended date because April 15, 2018 will fall on a weekend). And a taxpayer who has not yet filed his tax year 2014 return should file his original tax year 2014 return first without claiming the HCTC, and then file an amended 2014 return to claim the HCTC.

Effect on other documents. Taxpayers may continue to rely on Notice 2005-50, except as described above.