What you need to know about the Health Coverage Tax Credit

Tax Law and News health care and taxes

The Health Coverage Tax Credit (HCTC) is a federally funded assistance program that provides a 72.5% credit on Form 8885 to a relatively small number of individuals, their spouses, and dependents for qualifying health insurance premiums they paid. In October 2019, the IRS sent a letter to HCTC participants advising them to seek alternative insurance options due to the impending expiration of the program.

However, on Jan. 29, 2020, the IRS issued a superseding notice stating that the credit has been extended for all coverage months beginning in 2020. Here is a summary of what you need to know to advise your clients who may need help finding health coverage.

Who is eligible?

To be an eligible individual, your client must fall within either of two categories:

  1. You lost your job due to foreign competition and are eligible for Trade Adjustment Assistance (TAA) allowances.
  2. You are between age 55 and 64 years old, and receive benefits from the Pension Benefit Guaranty Corporation (PBGC pension recipient).

If your client files a joint return, only one spouse has to meet the eligibility requirements, and if your client can be claimed as a dependent on another person’s return, they cannot claim this credit. Eligibility is determined on a month-by-month basis; therefore, an individual may be entitled to a credit only for a portion of the year. If your client is an eligible individual, they will receive Form 8887, Health Insurance Credit Eligibility Certificate, in the mail stating that they are an eligible TAA, alternative TAA, or PBGC pension recipient.

Example: Your client loses their job in April 2019 because of foreign competition, and as an eligible recipient, they begin to pay health coverage starting May 1, 2019. The cost of the premium is $4,000. Your client pays $1,100 (27.5% of $4,000); the government pays $2,900 (72.5% of $4,000).

Being an eligible individual does not necessarily mean you can receive this credit. For example, if an individual has health coverage under Medicare Part A, Medicare Part B, Medicaid, the State Children’s Health Insurance Program (CHIP), the Federal Employees Health Benefits Program, any coverage that an individual or their spouse’s employer paid at least 50% of, or if an individual is eligible to receive benefits under the U.S. military health system (TRICARE), they cannot claim this credit. Individuals also do not qualify if they are imprisoned under a federal, state, or local authority.

Qualifying health insurance options

The qualifying health insurance options include the following:

  • Certain state-sponsored health insurance, if your client’s state elects to have it
  • The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA).
  • Coverage under a group plan available through the employment of one’s spouse.

It is always a good idea to check the state requirements. Some states can restrict or deny coverage applications if the individual does not enroll in a reasonable period of time or fail to make timely payments. If your client claims the HCTC, they cannot include the same premiums in determining their itemized medical deduction on Schedule A.

How to claim the credit

Your client can claim this credit in advance of filing their tax return, and  they are entitled to it even if they do not owe any taxes. Your client will need to register in advance by calling 866-628-4282 or completing Form 8885. You can claim the credit on Schedule 3, Line 13 of the 1040.

Other available options

If your client lost their job and does not meet the requirements for the HCTC, there are few other options available depending on their household size, income level, and other conditions:

Medicaid: As of January 2020, Medicaid provided health coverage to 63.9 million Americans. Unlike Medicare, this program is funded by both federal and state funds, and application rules vary by state. Many states have expanded Medicaid to cover all people below certain income levels regardless of their age. The Coronavirus Aid, Relief, and Economic Security (CARES) Act clarifies that non-expansion states can use the Medicaid program to cover COVID-19-related services for uninsured adults who would have qualified for Medicaid if the state had chosen to expand. It also clarifies that other populations with limited Medicaid coverage, such as impoverished pregnant women and individuals who are eligible due to certain health conditions, are also eligible for coverage.

CHIP: This program provides coverage for children under age 19, and in many states, to pregnant women who earn too much money to qualify for Medicaid and too little money for private insurance. Your clients can apply for this program either by completing an application at the Health Insurance Marketplace or through the state Medicaid agency. Like the Medicaid program, individuals can enroll in CHIP any time of the year. There is no limited enrollment period, and if your client qualifies, their coverage can start immediately.

COBRA: When COBRA was enacted in 1986, it imposed a new requirement on certain employers. Under federal law, if you work for a company that regularly employs 20 or more workers and has group health insurance, you are entitled to continue under the employer’s group plan, even if you leave your employment or hours are reduced below the level entitling you to employer-paid coverage. Note some states expanded employees’ rights, such as requiring employers to offer COBRA coverage with fewer employees. Electing COBRA coverage offers two main benefits: Individuals are still eligible for health insurance at an affordable group rate and a deduction for premium payments if they itemize their medical expenses.

Help your clients determine their eligibility

Help your clients in need of health coverage understand their options. Especially in these uncertain times, it’s an important part of your overall tax planning and preparation.

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