Guest Article

(From the June 9, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

IRS Web Site Has Information on Health Care Tax Credit for Individuals

The IRS's Web site (www.irs.gov) now includes information about the 65 percent Health Coverage Tax Credit (HCTC) for trade-displaced workers and certain individuals receiving pension benefit payments from the PBGC. The Web site information explains who is eligible for the HCTC and how to claim it, and also includes insights into how the advance HCTC will work when it becomes effective in August. Because the information is geared towards individuals, employers may want to refer those with questions about the HCTC to the Web site.

Background on the HCTC

In general, the Trade Act of 2002 created the HCTC to help trade-displaced workers pay for private health coverage, including COBRA coverage. The refundable credit is available to "eligible individuals," which means individuals receiving certain Trade Adjustment Assistance (TAA) benefits or individuals age 55 and older receiving pension payments from the PBGC, but only if they are not--

Eligible individuals can use the HCTC to offset only "qualified health coverage," including COBRA coverage. (Qualified health coverage also includes coverage provided by the individual's spouse's employer, but only if the employer pays less than 50 percent of the cost.)

Currently, eligible individuals must wait until the end of the tax year to claim the HCTC for all qualified health premiums paid during the year. Beginning in August 2003, eligible individuals will have the option of claiming the HCTC in advance so they can use it to help pay premiums as they become due.

Information About the Advance Credit

According to the IRS Web site, the PBGC and State Workforce Agencies will be responsible for notifying individuals that they may be eligible for the advance HCTC. The individual will then have to call the HCTC Customer Contact Center to verify eligibility and enroll for the HCTC. Once enrolled, the individual will send 35 percent of the premium amount to an HCTC Transaction Center, which will add the remaining 65 percent and forward the total to the health plan.

The good news for employers is that it appears they will be left out of the process of determining HCTC eligibility, and that they will not be responsible for advancing eligible individuals' COBRA premiums and seeking reimbursement from the government. But the information on the Web site does not address what will happen in cases where the HCTC Transaction Center fails to pay COBRA premiums on time. Group health plans can discontinue an individual's COBRA coverage for failing to make a premium payment on time-- a harsh outcome for the individual if a third-party is responsible for the late payment. Presumably Treasury will address this issue when it releases additional guidance on the advance HCTC.

Other HCTC Information on the IRS Web Site

In addition to information about the advance HCTC, the IRS's Web site includes an overview of the HCTC program, a series of questions and answers about the HCTC, specific eligibility requirements, and instructions for claiming the HCTC on annual tax returns, among other things.

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.