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Tuesday, January 18, 2011

Health Coverage Tax Credit

Bernadette Fernandez
Specialist in Health Care Financing

The Trade Act of 2002 (P.L. 107-210) authorized the health coverage tax credit (HCTC)—a federal income tax credit that covers most 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 experienced job loss. The third group consists of individuals whose defined benefit pension plans were taken over by the Pension Benefit Guaranty Corporation because of financial difficulties. Eligible individuals cannot be enrolled in certain other health insurance (e.g., Medicaid) or entitled to other specified coverage (e.g., Medicare Part A).

Due to widespread concerns about increasing unemployment, the 111
th Congress passed the American Recovery and Reinvestment Act of 2009 (ARRA), which, as part of reauthorization of the Trade Adjustment Assistance program, expanded eligibility for and benefits of the HCTC program. President Obama signed ARRA into law (P.L. 111-5) on February 17, 2009. ARRA changes to the HCTC program affect the tax credit’s subsidy rate, availability of payments, eligibility, qualified insurance, financing, and program administration. Most of these changes were temporary and were set to expire on January 1, 2011. To extend these expiring provisions through February 13, 2011, the 111th Congress passed H.R. 6517, the Omnibus Trade Act of 2010 (“Trade Act”). The President signed the Trade Act into law (P.L. 111-344) on December 29, 2010.

The HCTC may be applied to certain categories of qualified health insurance specified in statute; several of those insurance categories require state action (“state-qualified health plans”) to become effective. As of December 2010, 44 states and the District of Columbia made at least one of the state-qualified health plans available. In the remaining six states, only the categories 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.

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. For each year the HCTC has been available, less than 30,000 individuals have participated, out of hundreds of thousands of individuals who potentially are eligible for the credit. 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: January 5, 2011
Number of Pages: 21
Order Number: RL32620
Price: $29.95

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