Under the Affordable Care Act (ACA), certain low- and moderate-income people will qualify for health insurance tax credits beginning in 2014.  The tax credits will be jointly administered by the Internal Revenue Service (IRS) and Department of Health and Human Services (HHS) through the insurance exchanges.  The first open-enrollment period for the exchanges, and thus the first opportunity for individuals to apply for any available tax credits, begins on October 1, 2013, for health coverage that will become effective on January 1, 2014.  A governmental publication issued on August 5, 2013, clarifies the approach that will be taken to thwart fraudulent requests for these tax credits.

Eligibility for Tax Credit.  U.S. citizens or lawful residents of the U.S. with modified adjusted gross income of between 100-400 percent of the federal poverty line may be eligible for tax credits/subsidies in certain circumstances.  Eligible individuals would have to obtain their health insurance through an ACA exchange, and they must not be enrolled in their employer-sponsored group health plans.  That said, individuals could retain eligibility for a subsidy even if they have access to employer-provided health coverage, but choose to decline it in favor of exchange coverage, so long as that employer-provided coverage is “unaffordable” or does not provide minimum value. The amount of any available tax credit amount will vary based upon actual income levels, as well as available exchange health plan premium costs.

Substantiating Income Levels to Verify the Amount of Tax Credit. Income eligibility for subsidies will be based on the previous year’s income tax returns or certain other documentation such as pay stubs, if no tax form is available.  Centers for Medicare & Medicaid Service (CMS) is a federal agency within HHS.  CMS issued guidance in the form of a two-page question and answer memoranda confirming that for all states utilizing Federally-facilitated exchanges in 2014, all applications for health insurance subsidies, rather than just a random sample of such applicants, will be verified prior to receiving any subsidy.  CMS indicated that in general, for those exchanges, reported income levels within subsidy applications will be confirmed against tax records, Social Security records, or other means such as electronic wage reports supplied by Equifax.   Additionally, CMS reminded applicants (even those in state-run exchanges) that they will be attesting, under penalty of perjury, that they are not providing false or fraudulent information in seeking subsidies.

Mechanics of Tax Credit.  Applicants for the premium tax credit must affirmatively elect to receive the premium tax credit in advance, if so desired.  This means that exchange participants who are eligible for a subsidy do not necessarily have to wait until their taxes are filed to receive the subsidy for a given year.  This option is anticipated to be popular, given that many people with moderate income may feel financially unable to “front” the full premium amounts.  Individuals requesting their tax credit in advance for 2014 would pay only their allotted portion of the monthly premium costs to their insurer, with the government directly remitting the balance.  Of course, the risk of this approach is that individuals would face repayment obligations if their actual income levels exceeded original projects. Therefore, if applicants prefer to wait until their actual 2014 annual income levels are known, they can remit full premiums to insurers throughout 2014, and then claim their known tax credits when they file their federal taxes for that year.

Reconciliation Process.  Because initial premium tax credit availability is based upon the previous year’s income levels, the rules provide for a reconciliation process at the time that the person files a tax return for the year in which the tax credit is received. For the initial 2014 year, this means that any overpayment will be due at the time taxes are filed (in 2015). Conversely, if an individual’s income level for 2014 was actually lower than projected, an additional credit would be included within his or her tax refund for 2014.

Directing Individuals to Appropriate Resources.  Employers, group health plan sponsors, and healthcare providers will not be directly involved in the ACA’s exchange-based tax subsidy process, or in the income verification process associated with those subsidies.  However, employers are already preparing to transmit Exchange Notices to their employees in advance of the upcoming October 1, 2013 deadline, and should reasonably expect to receive general questions related to the exchanges and potential tax subsidies that may be available to members of their workforce. Employers may wish to direct inquiring persons to some of the many available “premium subsidy calculators” available on the internet.  Also, outreach efforts to affected low income populations by state and federal government agencies is expected to intensify, as we approach the first open enrollment period for the exchanges.