Prop regs fix a PTC issue 7 years later

The Affordable Care Act enables individuals to not only purchase insurance on an exchange but to also get a subsidy for it if they qualify. That subsidy is the Premium Tax Credit (PTC). There are eligibility criteria such as purchasing the coverage on an exchange (such as Covered California), if the person is employed the employer does not offer affordable coverage and the household income is below 400% of the federal poverty level.

When regs were issued in 2014 at the start of the PTC, section 36B(c)(2)(C)(i) that includes this clause:

"This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee."

Reg. 1.36B-2(c)(3)(v)(A)(2) interpreted that clause to mean that if the coverage offered to the employee was affordable, no one in that employee's household would qualify for a PTC even if the coverage offered to the family was not affordable.

I always thought that was an odd interpretation of the vague clause and contrary to the purpose of the ACA - to help more people get affordable coverage.  I think a possible reason for the odd interpretation is that the ACA is designed to encourage employers to offer affordable coverage to employees AND family members. So perhaps the thought was that employees would encourage employees to ask the employer to provide affordable coverage. Unfortunately, that is unrealistic, particularly where employees are low paid (such that their household income if below 400% of the federal poverty level (about $43K for a single person)).

Well, this month, the IRS issued proposed regs to fix this (REG-114339-21 (4/7/22)). A 4/5/22 Tweet from the Treasury Dept indicates that this change should enable about 1 million people to save hundreds of dollars per month on their coverage. Why is this finally being fixed? Apparently it is Executive Order 14009 (1/29/21) where Treasury was directed to find ways to strengthen the ACA via administrative actions. This is a good fix.

What about other needed fixes? One major one is that the PTC includes a cliff rather than a phaseout. So once household income exceeds 400% of the FPL, the taxpayer must pay back all of the PTC it received for that year. That can easily be $1,000 to over $10,000. That is harsh.  Also, the measure of household income is based on the entire year. So, if someone is out of work, say for the first 7 months of the year and can't afford health insurance, they can get the PTC, but if the job they get for the last 5 months of the year puts them above 400% of the FPL, they have to pay back the PTC even though they needed it for the first 7 months to buy health insurance.

That will need a legislative fix though.

And, before I leave this topic, in case anyone is thinking that this PTC subsidy of thousands of dollars is too good of a tax break, millions of individuals get tax breaks on health insurance. About 65% of employees have an employer who pays all or some portion of their health insurance. That benefit is tax free to the employees. So, if someone's employer contributes $10,000 to their health insurance and is in the 24% tax bracket, they save $2,400 in taxes. BUT, they also save shelling out $10,000 for the coverage paid by the employer. This is the most expensive tax break in the tax law in terms of reduced tax collections (see page 33 of this JCT tax expenditure report). And not all employees get this subsidy and it is worth more to those in a higher tax bracket.

What do you think?

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