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Friday, March 5, 2010

Health Coverage Tax Credit

Bernadette Fernandez
Analyst in Health Care Financing

The health coverage tax credit (HCTC) is a federal income tax credit that currently covers 80% of the cost of qualified health insurance for eligible taxpayers and their family members. Eligibility for the HCTC is limited to three groups of taxpayers, two of whom are individuals eligible for Trade Adjustment Assistance allowances because they lost manufacturing, service, or public agency jobs due to foreign trade or shifts in production outside the United States. The third group consists of individuals whose defined benefit pension plans were taken over by the Pension Benefit Guaranty Corporation because of financial difficulties. 

Due to widespread concerns about increasing unemployment, the 111th Congress passed the American Recovery and Reinvestment Act of 2009, which, as part of reauthorization of the Trade Adjustment Assistance program, expanded eligibility for and benefits of the HCTC program. President Obama signed the legislation into law on February 17, 2009 (P.L. 111-5). 

The HCTC may be applied to only 11 types of qualified health insurance specified in statute, seven of which require state action to become effective. As of January 2010, 44 states and the District of Columbia made at least one of these seven types of state-qualified health plans available. In the remaining six states, only the four types of qualified health insurance not dependent on state action (automatically qualified health plans) were potentially available, though not necessarily all persons who were eligible for the credit could avail themselves of these options. Eligible individuals cannot be enrolled in certain other health insurance (e.g., Medicaid) or entitled to other specified coverage (e.g., Medicare Part A). 

The HCTC is refundable, so taxpayers may claim the full credit amount even if they have little or no federal income tax liability. The credit can also be advanced, so taxpayers need not wait until they file their tax returns in order to benefit from it. Despite these features, the HCTC is not widely used. In 2006, approximately 28,000 households claimed the tax credit, accounting for only 12%-15% of households estimated to be eligible for the HCTC. Possible reasons explaining such low participation include not knowing the tax credit is available, barriers to finding qualified insurance, complexity of the application and enrollment process, and difficulties paying the part of the premium not covered by the tax credit. Concerns have also been raised about whether the HCTC is equitable, since it provides a large tax subsidy to some unemployed workers but not others, and whether it is efficient, since it has what some analysts consider large administrative costs.


Date of Report: February 24, 2010
Number of Pages: 17
Order Number: RL32620
Price: $29.95

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