IRS Releases Final Premium Tax Credit Rule

By Martha Heberlein

The final premium tax credit rule was published in the Federal Register on May 23rd. The rule, which describes eligibility for the health insurance premium tax credits, pretty much finalized what was proposed back in August. (For a summary on the math behind the calculations, check out HealthReformGPS.) However, there are a few interesting things to note –

Let’s start with what isn’t in there – the affordability test. For those of you who might need a bit of a refresher, a key factor for exchange subsidy eligibility is whether an individual or family has access to affordable health coverage. Those who have access to affordable coverage elsewhere generally do not qualify for subsidized exchange coverage.

For an individual employee, ESI coverage is considered affordable if the premium would consume less than 9.5% of family income. In drafting the proposed regulations, the Administration decided to use the same test to determine when a family is considered to have access to affordable ESI. Basically, that means that coverage would be considered affordable for a family if the cost of employee-only coverage is less than 9.5% of family income, regardless of the cost of a family policy. Using this sort of test would cause fewer children and their parents to be eligible for exchange subsidies.

Now while the omission could mean that IRS is rethinking the family penalty in light of so many comments or as it considers rules on other related issues (such as the definition of minimum value for employer-based coverage), they’re extremely tight-lipped so it’s hard to know what’s going on in their heads.

Second, let’s look at what they didn’t do – address premium stacking, where families are obligated to pay more than one premium because they purchase coverage from multiple sources. In 2014, many low- and moderate-income families will find themselves in such situations. For example, estimates suggest that 16.2 million Medicaid/CHIP-eligible children have a parent who, based on family income, would qualify for subsidized exchange coverage. The final rule rejected the idea of reducing the expected contributions of families to exchange coverage to reflect premium obligations for children in Medicaid/CHIP.

States, however, still retain the flexibility to modify their premiums in their Medicaid and CHIP programs to reflect this new reality.Massachusetts has taken such an approach – when a family is split between more than one coverage type or program and faces multiple premium obligations, they only have to pay the higher premium amount.

Now to end on an upbeat note, here’s what they did improve – premium calculations for people who get married mid-year. Under the proposed rule, the final premium credit for the newlyweds (calculated at reconciliation) would be based upon their combined annual income, rather than their individual income, which was used to determine the advanced payment. As their combined income as a married couple would likely be higher, such an approach would subject them to higher repayments. The final rule adjusts how the credit is calculated, which should limit their repayment liability.

More to come as we put all the regulatory pieces together, as well as eagerly await a long list of future guidance!