By Nancy Lopez

Background

On May 18, 2012, the Department of Treasury (Treasury) issued final regulations^[1] on the health insurance premium tax credits enacted by the Patient Protection and Affordable Care Act (ACA).^[2] The final regulations, which took effect May 23, 2012, contain amendments to the Income Tax Regulations (26 CFR part 1) and address several issues noted in the proposed regulations (NPRM) issued by the Treasury on August 17, 2011. The refundable premium tax credits were created to help make the purchase of health insurance through the health insurance Exchanges more affordable for low- to middle-income individuals ineligible for Medicaid and without affordable employer coverage. An earlier Implementation Brief provided an overview of the premium tax credits; this Update describes the key provisions of the final regulations.

Key Modifications made by the Final Regulations

Definitions

Family and Family Size: In response to public comments, the final regulations clarify that a family includes both individuals that are exempt from the requirement to maintain essential coverage under ACA section 5000A(e), as well as those individuals who are not subject to the 5000A penalty.^[3]

Modified Adjusted Income: The final regulations amend the proposed definition to include Social Security benefits not included in gross income pursuant to the Withholding Repeal and Job Creation Act,^[4] which was enacted after the NPRM.^[5]

Federal Poverty Line: The final regulations clarify that if a married couple or individual resides in two separate states with differing Federal poverty guidelines during the year, then the Federal poverty line that applies for purposes of 36B is the higher poverty line.^[6]

Rating Area: The proposed regulations had defined “rating area” as the Exchange service area but in response to comments that an Exchange service area is different from a rating area, the final regulations leave the definition reserved for further determination.^[7]

Premium Tax Credit and Federal Programs

• The final regulations extend the time in which individuals must complete the requirements necessary to receive coverage from government-sponsored programs, by deleting the proposed words “reasonable promptness” for the time required to complete such requirements and instead allows the individual up to three months following an eligibility determination to complete the requirements.^[8]
• Additional guidance will be provided on when or if an individual becomes “eligible for government-sponsored minimum essential coverage” because of a particular illness or condition.^[9]

Premium Tax Credits and Employer-Sponsored Coverage

The final regulations:

• do not address the most criticized provision of the proposed regulations — that employer affordability is based on the employee’s cost for an individual plan — except to state that the affordability issue would be addressed in future guidance, along with determining minimum value and eligibility of dependents for the premium tax credit.^[10]
• authorize the Commissioner of Internal Revenue to provide future guidance on how wellness program incentives that increase or decrease the employee’s share of premiums affect the affordability of eligible employer-sponsored coverage.^[11] Comments are requested regarding wellness incentives.
• provide that the affordability safe harbor will not apply to a taxpayer who, with reckless disregard, misrepresents to the Exchange an employee’s portion of annual premiums.^[12] The final regulations further clarify that the affordability safe harbor only applies until the availability of employer sponsored coverage changes at which point a new affordability determination is required.^[13] If an employer imposes a ninety-day waiting period before the employee is eligible for coverage, the employee (or related individual) is eligible for the premium tax credit until coverage become available.^[14]
• allow employees who are automatically enrolled in coverage that is unaffordable to be eligible for the premium tax credits if the employee (or related individual) disenrolls before the last day of any opt out period or the first day of the second full calendar month of plan year.^[15]
• provide that non-dependent individuals who are eligible to enroll in minimal essential coverage because of their relationship to another person who is eligible for such coverage (e.g., a domestic partner) are not automatically disqualified from receiving a premium tax credit.^[16]

Computing of Premium Tax Credit

The final regulations:

• provide that an individual is eligible for a premium tax credit for a month (called a “coverage month”) if the individual was not eligible for minimum essential coverage for at least one day of the month and the individual was enrolled in a qualified health plan on the first of that month. However, the individual will not be entitled to a premium tax credit for that month if the taxpayer’s monthly share of premiums is not paid in full by the unextended tax return filing deadline.^[17]
• provide that if at least one silver-level health plan in the Exchange does not cover all the members of the taxpayer’s family (e.g., because of non-traditional relationships) under one policy, then the premium for the applicable benchmark plan is the premium for a single policy or a combination of premiums that is the second-lowest silver option for covering the entire family.^[18]
• reserves for future guidance the rule for determining the appropriate benchmark plan for families with members that live in different geographical regions.^[19]