Menu
Tax Notes logo

CRS Updates Report on Health Coverage Tax Credit

OCT. 26, 2011

RL32620

DATED OCT. 26, 2011
DOCUMENT ATTRIBUTES
Citations: RL32620

 

Bernadette Fernandez

 

Specialist in Health Care Financing

 

 

October 26, 2011

 

 

Congressional Research Service

 

7-5700

 

www.crs.gov

 

RL32620

 

 

Summary

The Trade Act of 2002 (P.L. 107-210) authorized the health coverage tax credit (HCTC) -- a federal income tax credit that subsidizes 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 (TAA) 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).

The 112th Congress passed the Trade Adjustment Assistance Extension Act of 2011, part of H.R. 2832, "An Act to extend the Generalized System of Preferences," on October 12, 2011. The President signed it into law on October 21, 2011 (P.L. 112-40). Key changes to the HCTC include establishing a new subsidy rate of 72.5% and termination of the tax credit on January 1, 2014.

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.

                            Contents

 

 

 Introduction

 

 

 Background

 

 

      Eligible Taxpayer Groups

 

 

           Trade Readjustment Allowances

 

 

           Reemployment Trade Adjustment Assistance

 

 

           Pension Benefit Guaranty Corporation

 

 

      Limitations on Eligibility

 

 

      Family Members

 

 

      Qualified Health Insurance

 

 

 Implementation

 

 

      Notifying Eligible Individuals

 

 

      Availability of a Qualified Health Plan

 

 

      Claiming the Tax Credit

 

 

           Next-Year Payments

 

 

           Advance Payments

 

 

      Grants to States

 

 

 Analysis of Program Design and Implementation

 

 

      Effectiveness

 

 

           Participation

 

 

           Knowledge of HCTC benefit

 

 

           Availability of Qualified Health Plans

 

 

           Complexity

 

 

           Affordability

 

 

           Other Factors Affecting Participation

 

 

      Equity

 

 

      Efficiency

 

 

 Changes to the HCTC Program Enacted Under P.L. 112-40

 

 

 Contacts

 

 

 Author Contact Information

 

 

Introduction

The Trade Act of 2002 (P.L. 107-210) authorized a federal income tax credit -- Health Coverage Tax Credit1 (HCTC) -- for certain workers who have experienced job loss, and for retirees whose private pension plans were taken over by the Pension Benefit Corporation.2 The purpose of the tax credit is to make the purchase of health insurance more affordable for such individuals.

This report outlines the current rules regarding eligibility for the HCTC and the types of health insurance to which the tax credit may be applied. It discusses federal and state implementation of the HCTC, as well as the credit's effectiveness in reaching targeted populations and related equity and efficiency issues. The report also includes a description of the most recent changes to the HCTC program as enacted under the Trade Adjustment Assistance Extension Act of 2011, part of H.R. 2832, "An Act to extend the Generalized System of Preferences," (P.L. 112-40).3

Background

The Health Coverage Tax Credit currently covers 72.5%4 of the premium for qualified health insurance purchased by an eligible taxpayer. The taxpayer is responsible for covering the remaining 27.5% of the premium. Eligible taxpayers may apply the HCTC only to the categories of qualified health insurance specified in statute. The HCTC is refundable, so taxpayers may claim the full credit even if they have little or no federal income tax liability. The credit also may be advanced, so taxpayers need not wait until they file their tax returns in order to benefit from the credit. The tax credit program will terminate on January 1, 2014.

The HCTC is not used widely. 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.5 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.

Eligible Taxpayer Groups

To claim the HCTC, taxpayers must be in one of three eligibility groups and not enrolled in (or sometimes even eligible for) certain types of health insurance. Some other statutory limitations also apply. In addition, eligible taxpayers must pay for qualified health insurance, the rules for which are discussed immediately after this section.

Three groups of taxpayers are eligible to claim the HCTC:

  • individuals receiving income support in the form of Trade Readjustment Allowances (TRA) under the Trade Adjustment Assistance (TAA) program, including persons eligible for, but not yet receiving, the allowance because they have not yet exhausted their state unemployment benefits;

  • individuals receiving wage subsidies in the form of Reemployment Trade Adjustment Assistance (RTAA) benefits; and

  • individuals between the ages of 55 and 64 who are receiving payments from the Pension Benefit Guaranty Corporation (PBGC).

 

The first two groups consist of individuals who have lost manufacturing, service, or public agency jobs due to international trade, or shifts in production or supply of services outside the United States. The U.S. Department of Labor (DOL) must certify that workers dislocated by these events are eligible for TAA assistance. Certification occurs upon petition from the workers, the affected company, a union, or others. After a petition is certified, workers are notified by a state workforce agency (SWA) and may apply for TAA benefits at One-Stop Career Centers.6 TAA benefits include income support, counseling and other employment services, job search and relocation allowances, and training.7 Individuals receiving TAA assistance may be eligible to claim the HCTC.

Trade Readjustment Allowances

To be eligible for a TRA (the first eligible taxpayer group identified above), individuals must have exhausted state unemployment compensation. Generally, individuals must also be enrolled in TAA-approved training within 26 weeks of the later of either the date they were certified TAA eligible or the date of job separation, have completed such training, or received a training waiver. However, HCTC eligibility also includes individuals who are receiving TAA benefits but are not enrolled in training. TRA consists of two components: basic TRA and additional TRA. The statutory maximum time period for receiving TRA is 130 weeks; for persons in remedial training, the maximum is 156 weeks. Persons receiving benefits under TAA are eligible for the HCTC as long as they are receiving either unemployment benefits or the allowance, and for one month afterwards.8

Reemployment Trade Adjustment Assistance

To be eligible for reemployment TAA (the second taxpayer group identified above), individuals must be certified eligible for TAA, age 50 or older, have been re-employed but not at the firm from which the worker originally separated, not earning more than $55,000 per year in wages,9 and either obtained employment on a full-time basis, or on a part-time basis and enrolled in approved training. Individuals who elect RTAA receive wage supplements worth half the difference in salary between their old and new jobs for a maximum of $12,000 over two years.

Pension Benefit Guaranty Corporation

To receive a PBGC pension benefit (the third group identified above), individuals must have worked for a firm whose defined benefit pension plan was insured and then taken over by the federal agency.10 The PBGC assumes control of defined benefit plans (pension plans that promise to pay a specific monthly benefit at retirement) when it determines the plans must be terminated to protect the interests of participants (for example, if currently due benefits cannot be paid) or when employers demonstrate they cannot remain in business unless the plan is terminated. The PBGC uses plan assets and its own insurance reserves to pay the pensions (up to a guaranteed amount) to the former workers and their survivors. Individuals receiving PBGC-paid pensions are eligible for the HCTC provided they are at least 55 years of age but not yet entitled to Medicare (which usually occurs at age 65).

Limitations on Eligibility

The HCTC program places several limitations on eligibility, even for those individuals in the three groups just described. Persons enrolled in the following health plans are not eligible for the tax credit:

  • a plan (including COBRA elections described below) maintained by the individual's employer or former employer (or the spouse's employer or former employer) that pays 50% or more of the total premium;11

  • Medicare Part B;

  • the Federal Employees Health Benefits Program (FEHBP);

  • Medicaid; or

  • the State Children's Health Insurance Program (CHIP).

 

Similarly, to be eligible for the HCTC, individuals cannot be entitled to the following:
  • Medicare Part A; or

  • coverage provided through the U.S. military health system (e.g., Tricare or CHAMPUS).

 

In addition, individuals are not eligible for the tax credit if they are incarcerated, or if they may be claimed as a dependent by another taxpayer.

Family Members

Eligible individuals may use the HCTC for health insurance that covers a spouse and dependents who can be claimed on their tax return. For this purpose, children of divorced or separated parents are treated as dependents of the custodial parent.

Qualifying family members face the same enrollment limitations as eligible taxpayers (i.e., they cannot be enrolled in or entitled to the insurance described above). Family members may continue to receive the tax credit for up to two years after any of the following events occur: the qualified taxpayer becomes eligible for Medicare, the taxpayer and spouse are divorced, or the taxpayer dies.

Qualified Health Insurance

An eligible individual can claim the HCTC only to help cover the premium for "qualified health insurance." The statute limits qualified health insurance to 11 categories of coverage, identified as options (A) through (K). The tax credit cannot be claimed for any other insurance.

Four of the coverage categories are referred to as automatically qualified health plans. Individuals may elect these options without involvement by their state. These options (identified by their statutory letter designation) are as follows:

 

A. Coverage under COBRA;12

I. Coverage under a group health plan available through a spouse's employer;

J. Coverage under individual health insurance provided the eligible individual was covered under this type of insurance for the entire 30-day period ending on the date the individual became separated from employment which qualified the individual as a TAA, RTAA, or PBGC pension recipient;13 and

K. Coverage funded by voluntary employees' beneficiary associations.14

 

The other seven categories of coverage are known as state-qualified health plans.15 Individuals may choose these options only if their state has established these plans. These options (identified by their statutory letter designation) are as follows:

 

B. State-based continuation coverage provided under a state law requiring such coverage;

C. Coverage offered through a state high risk pool;16

D. Coverage under a plan offered for state employees;

E. Coverage under a state-based plan that is comparable to the plan offered for state employees;

F. Coverage through an arrangement entered into by a state and a group health plan, an issuer of health insurance, an administrator, or an employer;

G. Coverage through a state arrangement with a private sector health care purchasing pool; and

H. Coverage under a state-operated plan that does not receive any federal financing.

 

Coverage under state-qualified health plans must provide four consumer protections, specified in statute, to all "qualifying" individuals. Qualifying individuals are defined in the statute as HCTC eligible individuals (as described above) who have had three months of "creditable coverage" under another health plan prior to applying to a state-qualified plan,17 and do not have a significant break in coverage (defined as 63 days or more without coverage). For such individuals, state-qualified health plans must guarantee issue (offer coverage to all qualifying applicants), and not deny coverage based on preexisting conditions. Premiums (without regard to subsidies) must not be greater for qualifying individuals than for other similarly situated individuals, and benefits for qualifying individuals must be the same as or substantially similar to benefits for others. In short, the statute attempts to ensure that state-qualified health plans are open to all qualifying applicants, and do not charge more or provide fewer benefits to people who are receiving the tax credit. The consumer protections do not preclude use of medical underwriting to set premiums.

Certain types of coverage are not considered qualified plans, even if they otherwise fall in one of the categories above. Such coverage includes accident or disability income insurance, liability insurance, workers compensation insurance, automobile medical payment insurance, credit-only insurance, coverage for on-site medical clinics, limited scope dental or vision benefits, long-term care insurance, coverage for a specified disease or illness, hospital and other fixed indemnity insurance, and supplemental insurance.

Implementation

Implementation of the HCTC relies on the participation of several federal and state agencies. The Department of the Treasury is primarily responsible for administering the advance payment system (provides the HCTC on a monthly basis to coincide with payment of insurance premiums) and, through the Internal Revenue Service, reviewing tax returns on which the credit is claimed. The Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC) are responsible for helping Treasury identify who might be eligible for the credit. DOL also coordinates the One-Stop Career Center system; these centers provide a full range of services to assist job seekers. Lastly, DOL administers two grant programs that provide assistance to states to establish the infrastructure to administer the program and provide temporary subsidies to individuals waiting for their first tax credit payment.

State-level entities include state workforce agencies (SWAs) -- various agencies, funded by DOL, that administer unemployment and TAA benefits. Other relevant state entities include the departments of insurance (specifically regarding state-qualified health plans) and health agencies.

To support administration of the HCTC, Congress has authorized and provided appropriations to cover ongoing operational expenses. The 111th Congress passed the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5), which authorized $80 million in appropriations for FY2009-FY2010 to support implementation of HCTC-related amendments that were enacted under ARRA. In addition, ARRA provided $150 million in appropriations for FY2009-FY2010 to fund existing state grant programs to provide program administration assistance and premium subsidies to eligible individuals.

Notifying Eligible Individuals

Beginning in 2002, DOL's Employment and Training Administration requested that SWAs mail HCTC information packets to all eligible TAA recipients or persons who would be eligible for TAA allowances as soon as they exhaust their unemployment benefits.18 Included with the information packet is an HCTC eligibility certificate, a document that identifies the individual as potentially eligible for the tax credit. SWAs are also required to submit to the HCTC office a daily listing of persons eligible for TRA and RTAA.

Similarly, the PBGC identified beneficiaries who are potentially eligible for the HCTC and provided the IRS with their relevant personal records, including names, addresses, social security numbers, and dates of birth.19 Starting in February 2003, the IRS sent information packets, including forms and instructions for claiming the credit, to those persons in the PBGC list.

The HCTC office mails packets to persons whose names are included on the lists provided to them by the SWAs and PBGC. Labor unions and advocacy groups also inform members of their potential eligibility.

The HCTC program has had difficulty notifying one group of eligible individuals: persons who are receiving unemployment compensation but have not yet applied for TAA benefits. Unless they petition the DOL directly, their names and contact information are not easily identified. Unemployment compensation can last up to 26 weeks in most states, and recipients often don't apply for TAA benefits until near the end of that period. These persons, probably the largest group of TAA eligible individuals, generally will not receive notification about their HCTC eligibility until their unemployment benefits end.

Availability of a Qualified Health Plan

The HCTC is available only to eligible taxpayers who enroll in "qualified health insurance," as described above. The automatically qualified plans are potentially available in all states, but only for certain individuals. COBRA continuation coverage (option A in the list under the "Qualified Health Insurance" section) is available only if an individual's previous employer continues to offer health benefits to its remaining workers or retirees. If the company drops coverage completely or goes out of business, a COBRA election is not possible. Coverage under a group health plan available through the employment of a spouse (option I) is available only if one is married and the spouse has coverage. Even if the spouse has coverage, the credit is not available if the spouse's employer pays 50% or more of the cost, which usually is the case under employer-sponsored health insurance. Individual health insurance coverage (option J) generally is not available due to the requirement that the worker had such coverage before loss of employment.20 Finally, coverage funded through a VEBA (option K) depends on an employer having established a VEBA.

The remaining qualified health plans (options B through H) are available only if states designate them as qualified insurance. As of December 2010, 44 states and the District of Columbia made at least one of the seven state-qualified plan types available.21 In the remaining six states (Delaware, Mississippi, Nevada, New Mexico, South Dakota, and Wyoming), individuals who are eligible for the HCTC can select only from the automatically qualified plan options, if an option is available to them.

Claiming the Tax Credit

Eligible taxpayers with qualified insurance may choose to receive the HCTC after they file their tax returns for the year, generally in the period February 1 through April 15 of the following year. Alternatively, they may choose to receive advance payments for the credit, on a monthly basis, throughout the year. Some might choose to receive a portion of the credit through advance payments and the remainder after they file their return. Advance payments are not available for coverage through a spouse's employment (option I).

Next-Year Payments

Taxpayers claim the HCTC after the tax year is over by completing Form 8885 and attaching it to their standard Form 1040. The credit cannot be claimed with standard forms 1040A or 1040EZ. Taxpayers must attach invoices and proof of payment to qualified health plans.

As the HCTC is refundable, taxpayers may receive the full amount for which they are eligible even if they have little or no tax liability. Their other tax credits have no effect on their HCTC, nor does the HCTC affect their other credits.

Advance Payments

To receive advance payments of the credit, individuals register with the HCTC program through its Customer Contact Center. They must be enrolled in a qualified health plan when they register. The program confirms applicants' eligibility and sends them an invoice for the taxpayer's share of the total monthly premium (the taxpayer's share of the premium is 27.5% because the HCTC's subsidy rate is 72.5%). Participants send payments for this share plus additional premium charges for non-qualified family members (if applicable) to the Department of the Treasury. Upon receipt of these funds, Treasury sends payment for 100% of the premium (comprised of 27.5% from the participant and 72.5% from Treasury) to the participants' health insurance plans. The payment system continues in this way on a monthly basis. Advance payments became available in August 2003.

An eligible taxpayer may also receive retroactive payments to cover health insurance costs incurred during the time the IRS takes to certify HCTC eligibility and make the first advance payment. Any retroactive payment would be reduced by any payments received by the taxpayer, for purchase of health insurance, through the National Emergency Grant program (see discussion in the following "Grants to States" section for additional details about this program).

Grants to States

Section 203 of the Trade Act of 2002 expanded the National Emergency Grant (NEG) program to support implementation of the HCTC.22 It authorized two new state grant programs to be administered by the Labor Department: Infrastructure Grants and Gap Filler Grants. In addition, Section 201 of the act authorized new funding to be made available through the Centers for Medicare and Medicaid Services (CMS) in the Department of Health and Human Services to help states create new high risk pools and fund existing ones.

Infrastructure grants assist states in developing administrative systems to conduct eligibility verification, notify eligible individuals, provide enrollment assistance, install data management systems, and support other administrative functions. Once the systems and procedures were in place and the state began supporting operations of the HCTC program, the state could request modifications to cover ongoing operational costs.

Gap Filler grants (formerly known as Bridge grants) are awarded to states to subsidize eligible individuals during the HCTC enrollment process when they are responsible for 100% of the premium. Distributions are made during the months required for the IRS to enroll, process, and make the first HCTC payment. The IRS typically takes between one to three months (referred to as the "gap period") to complete this process. Gap Filler payments cover the portion of the premium that will later be covered by advance payments.

State High Risk Pool grants are provided to states to help them establish and fund programs for individuals who cannot obtain or afford private market health insurance, primarily because of preexisting health conditions. Although the grants did not directly support administration of the HCTC, they were intended to help states provide a state-qualified plan option to individuals eligible for the HCTC (see letter C in the list under "Qualified Health Insurance"). As of December 2010, there were 35 state high risk pools.23 Federal appropriations for state high risk pools were first made available through the Trade Act of 2002 (P.L. 107-210). Congress has provided additional appropriations since then, including the 111th Congress through the Omnibus Appropriations Act of 2009 (P.L. 111-8) and the Consolidated Appropriations Act of 2010 (P.L. 111-117).

Analysis of Program Design and Implementation

The Trade Act of 2002 became law on August 6, 2002, and the HCTC became effective that December. Advance payments began August 1, 2003. During that first year, the Department of the Treasury and the DOL established supporting administrative arrangements, which they continued to refine after advance payments were implemented.

Throughout implementation and operation of this program, observers have raised questions about the effectiveness of the HCTC in assisting taxpayers obtain or retain health insurance coverage. Others question the equity of the program design and raise concerns about its overall efficiency. These issues are discussed in this section.

Effectiveness

Data for the HCTC indicate that it is not widely used, raising questions about its effectiveness. At this time it is not clear whether changes to the HCTC program will lead to more taxpayers using the credit, or if participation will always be low.

Participation

As discussed earlier, for each year the HCTC has been available, less than 30,000 individuals have claimed the HCTC, out of hundreds of thousands of individuals who potentially are eligible. Key ARRA provisions expanded both eligibility for and benefits of the HCTC program, which affected HCTC participation once those provisions were implemented. Prior to ARRA, approximately 14,000 individuals per month received the tax credit as advance payments. Since ARRA enactment, the monthly participation rate for advance payments has increased 36%.24

Knowledge of HCTC benefit

One possible reason for the low use of the tax credit among eligible persons is that many workers may be unaware of the benefit in the first place. According to one Government Accountability Office (GAO) study, at most of the work sites they surveyed, more than half of the workers who visited One-Stop Career Centers were not aware of this benefit. This is despite efforts by federal and state programs, local officials, unions, and others to inform workers of the HCTC program. Some workers indicated that they would have applied for the tax credit had they known about it.25

Availability of Qualified Health Plans

As of December 2010, 44 states and the District of Columbia made at least one of the state-qualified plan types available; most states provided multiple plan options. These states include the vast majority of HCTC eligible individuals. In addition, eligible individuals may be able to access one of the automatically qualified plan options. As a practical matter, however, some who are eligible for the HCTC continue to face difficulty in finding a qualified plan.

For example, COBRA continuation coverage (option A) in the list under "Qualified Health Insurance" section) is available only if the former employer had at least 20 workers and continues to offer health benefits to its remaining workers. One study, citing federal officials, noted that roughly 40% to 60% of HCTC eligible individuals have access to COBRA coverage; which means COBRA is not available to the remainder.26 The spousal coverage and individual health insurance options (letters I and J) have requirements that rule out most eligible individuals -- for the former, one must be married to someone with coverage not largely paid for by their employer; for the latter, one must have had individual insurance before termination of employment.

As discussed above, a majority of states offer at least one state-qualified plan option. However, six states do not. Eligible individuals in these states must be eligible for the automatically qualified plans discussed above or they will not be able to benefit from the tax credit.

Consumer Protection Requirements

One issue related to state-qualified plan options is whether the consumer protection requirements (guaranteed issue, no coverage denial based on preexisting conditions, and substantially the same premiums and benefits for people who are eligible and those who are ineligible) reduce the availability and increase the cost of such plans. These requirements impose stricter standards on health plans than other federal and most state laws.27 As a result, when the Trade Act of 2002 was enacted, many health plans sponsored or arranged by states did not meet the consumer protection requirements specified in the statute. In order to qualify a plan for the HCTC, states have had either to modify existing plans or to establish new ones. Sometimes this could be done by administrative action, but often it required state legislation. For some states, approving new plans has been difficult because of budget crises. Even if approval is achieved, budget constraints limit the amount of financial risk states are willing to take.

Patient advocates and others contend that consumer protections, in general, make access to insurance more equitable and should apply to everyone, regardless of insurance status or medical need.28 Although such observers acknowledge the consumer protections under the HCTC program, some argue that those requirements are not comprehensive enough. They argue that without broad requirements, health plans may still charge a high premium to persons with greater health care needs, particularly older workers and early retirees, making it difficult for them to find affordable coverage.29

Complexity

In addition to finding an available health plan that qualifies for the HCTC, eligible individuals must navigate a complicated enrollment system in order to receive the tax credit. "Workers must apply to between two and five public and private entities and frequently must deliver to one or more of these entities hard-copy documents issued by the others."30 This burden was highlighted in responses to a DOL survey asking state officials for their views on the primary reason for low participation.31 Complexity was second only to affordability as the factor mentioned the most.

Affordability

Even if qualified insurance is available, and a person has access to the tax credit, currently 27.5% of the premium is not covered. This contribution level may be unaffordable, especially considering most HCTC eligibles are no longer working. Previously, when the tax credit was first enacted, a majority of state officials surveyed mentioned affordability as the primary factor for low use of the HCTC.32

Other costs may also be important. Some people might not apply for coverage since applicants must pay 100% of the premium pending completion of the enrollment process (unless that person receives retroactive payments, or subsidies through the Gap Filler grant program). Some might calculate that the copayments, deductibles, and other cost-sharing requirements would require sizable out of pocket expenditures.

Other Factors Affecting Participation

Additional reasons why the HCTC participation is low may include the following:

  • delays in identifying dislocated workers receiving unemployment benefits who have not yet applied for TAA benefits;

  • delays in certifying that dislocated workers are eligible for TAA assistance; and

  • decisions by some people that health insurance is relatively unimportant, even if affordable.

 

Equity

Tax credits often are seen as a way to improve tax equity since the savings they yield are not based on taxpayers' marginal tax rates. In contrast, tax savings from a deduction or the widely-used exclusion for employer-provided insurance vary with marginal rates; so taxpayers in higher-income brackets receive greater tax savings than those in lower-income brackets. In addition, the health coverage tax credits are refundable, so low-income taxpayers can receive the full value of the credit even if they have little or no tax liability.

The current 72.5% HCTC subsidy rate is available to all eligible taxpayers with qualified insurance, regardless of income. From the standpoint of inclusiveness, this seems equitable. Considering ability to pay, however, the one rate is inequitable. The 72.5% rate provides the same level of assistance to taxpayers with higher incomes and taxpayers with lower incomes, even though the former can more readily pay for their insurance. For illustrative purposes only, say an individual enrolls in a self-only policy with an annual premium of $6,000. The HCTC would provide $4,350 in tax savings to qualified taxpayers regardless of their income. So, for example, one taxpayer with annual income of $50,000 and another taxpayer with annual income of $15,000 would receive the same tax subsidy amount: $4,350. Proposals for a more generally-available tax credit reflect these different perspectives; some would have one rate for all taxpayers while others would phase out the rate for higher income taxpayers.

Another equity issue relates to who is eligible for the tax credit. Unemployed workers who do not receive TAA allowances may question why they are denied the credit, particularly if they too have lost their jobs because of trade competition. Similarly, early retirees whose pensions are not paid in part by the PBGC may question not being eligible for the credit, as may those who receive no pension at all.

Efficiency

Some observers of the HCTC have voiced concerns regarding the efficiency with which the program is run. Given the complexity involved with enrollment and administration of the tax credits themselves, it is not surprising that operational costs constitute a significant portion of overall program costs, especially during the start-up phase. However, administrative costs remain high even after a few years of operation. For instance, the GAO estimated that between 2003 and 2008, the federal government incurred $161 million in administrative costs. This constituted 17% of total HCTC-related costs ($953 million) for those years combined.33

Another study estimated that of the federal funding going towards advance payments in 2007, a full third would be spent on administration.34 This leaves only 66 cents for every federal dollar spent on the advance payment component for purchasing health coverage.

Moreover, between 2009 and 2011, the IRS estimates it will spend around $40 million to implement legislative changes and upgrade computer systems related to the HCTC program. Given these changes, the IRS assumes that the proportion of total HCTC costs attributable to administration is likely to increase during that time. However, the IRS assumes that such spending on systems operations will decrease after 2011, absent significant changes to the HCTC program.35

Changes to the HCTC Program Enacted Under P.L. 112-40

The 112th Congress passed the Trade Adjustment Assistance Extension Act of 2011, part of H.R. 2832, "An Act to extend the Generalized System of Preferences," on October 12, 2011. The President signed it into law on October 21, 2011 (P.L. 112-40). The law includes a number of HCTC-related provisions, which affect the program's duration, subsidy rate, availability of payments, eligibility criteria, and definition of qualified insurance, among other program components. The effective date for these changes are for coverage months beginning after February 12, 2011.

Some of the key HCTC-related provisions enacted under P.L. 112-40 make the following changes:36

  • Terminates the HCTC on January 1, 2014.

  • Changes the subsidy rate to 72.5%.

  • Allows one or more retroactive payments to be made to eligible taxpayers to cover costs incurred during the time the Internal Revenue Service takes to certify HCTC eligibility and make the first advance payment. (Retroactive payments would be reduced by any payments received by the taxpayer, for the purchase of health insurance, under the National Emergency Grant (NEG) program.)

  • Modifies the definition of an "eligible TAA recipient" to include persons who receive unemployment compensation but are not enrolled in training, and individuals who would be eligible for a trade readjustment allowance except that they are in a break in training that exceeds a specified time period.

  • Expands eligibility to allow qualifying family members to continue to receive the HCTC for up to two years after any of the following events occur: the qualified taxpayer becomes eligible for Medicare, the taxpayer and spouse are divorced, or the taxpayer dies.

  • Expands the types of qualified health insurance to include an additional option: health plans funded by voluntary employees' beneficiary associations.

 

Author Contact Information

 

Bernadette Fernandez

 

Specialist in Health Care Financing

 

bfernandez@crs.loc.gov, 7-0322

 

FOOTNOTES

 

 

1 The Internal Revenue Service (IRS) refers to the credit as the "health coverage tax credit." However, the credit is sometimes known as the "trade adjustment assistance credit" (or TAA credit) and the "Trade Act credit." It appears in budget documents as the "tax credit for health insurance purchased by certain displaced and retired individuals." A similar phrase is used by the Joint Committee on Taxation. This report uses the term "health coverage tax credit" to conform to IRS practice.

2 The Internal Revenue Service's website, http://www.irs.gov, includes information on the HCTC program and administration of the credit. A search for "HCTC" on the IRS homepage will list the overview document first. This document not only provides an overview of the program, but also includes links for eligible individuals, state agency officials, and health plan officials, as well as a glossary and a list of frequently asked questions.

3 The statutory amendments included under P.L. 112-40 technically extend HCTC program changes that were initially made under the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) and temporarily extended under the Omnibus Trade Act of 2010 (P.L. 111-344). For simplicity's sake, this report's description of the HCTC program incorporates the latest statutory changes enacted under P.L. 112-40 to the program.

4 When the HCTC was initially authorized in 2002, the subsidy rate was 65%. The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) temporarily increased the subsidy rate to 80%, with a sunset date of February 13, 2011. Under P.L. 112-40, the subsidy rate of 72.5% became retroactively effective on that date.

5 Government Accountability Office, "Health Coverage Tax Credit: Participation and Administrative Costs," April 30, 2010, available at http://www.gao.gov/new.items/d10521r.pdf. (Hereinafter cited as "Participation and Administrative Costs.")

6 State workforce agencies are state offices, funded by the DOL, that are responsible for administering unemployment insurance, employment and training services, and labor market information programs in the 50 states and the District of Columbia. One-Stop Career Centers are part of a coordinated delivery system of employment and training services; they are organized by local workforce investment boards under the Workforce Investment Act of 1998. To search for locations of such centers, see http://www.servicelocator.org.

7 Information on TAA and RTAA is available through the DOL website. Also see CRS Report R42012, Trade Adjustment Assistance (TAA) for Workers.

8 Section 35(c) of the Internal Revenue Code extends eligibility for the HCTC for one month following the end of TAA eligibility. This would apply to individuals receiving a trade readjustment allowance.

9 However, eligible workers may have combined wages and RTAA payments that exceed $55,000 per year.

10 Information on the PBGC is available through its website at http://www.pbgc.gov. For an overview, see CRS Report 95-118, Pension Benefit Guaranty Corporation (PBGC): A Fact Sheet.

11 Premiums paid by employees through a cafeteria plan (i.e., premium conversion arrangements) are considered to be paid by the employer. Additional eligibility restrictions apply to RTAA individuals for certain types of insurance if their current or previous employer (or the current or previous employer of a spouse) pays part of the coverage, or the premium could be paid on a pre-tax basis.

12 COBRA refers to the Consolidated Omnibus Budget Reconciliation Act of 1985 (P.L. 99-272). Title X of this legislation requires employers with 20 or more employees that already offer health insurance to provide the option of continuing coverage to certain employees and their families under specified circumstances (such as termination, reduction in work hours, death, divorce or legal separation, and other circumstances) for a limited time. Employers may charge the beneficiary up to 100% of the premium (counting both the employer and employee shares) plus 2% to cover administrative expenses. Individuals generally have 60 days from either formal notification by the employer or date of loss of coverage in which to elect COBRA coverage, though Section 203(e) of the Trade Act of 2002 authorizes an extension of the election period for individuals who are eligible for TAA assistance. For additional information, see CRS Report R40142, Health Insurance Continuation Coverage Under COBRA.

13 The requirement for prior coverage does not apply to individual insurance obtained through a state-qualified plan. This exception is not explicit in the statute.

14 Voluntary Employees' Beneficiary Association (VEBA) plans provide life insurance, medical, disability, accident and other welfare benefits to employee members and their dependents. Most are organized as trusts to be legally separate from employers. Provided certain conditions are met, the investment earnings of VEBAs are exempt from taxation, as are the benefits paid out if the benefit would normally be exempt. VEBAs may be funded by employers or employees.

15 For a list and contact information of state-qualified health plans in each state, see the IRS website at http://www.irs.gov/individuals/content/0,,id=187058,00.html.

16 State high risk pools are health insurance programs designed for individuals with pre-existing health conditions who experience difficulty in obtaining coverage in the private market. For additional information about these pools, see CRS Report RL31745, Health Insurance: State High Risk Pools. (Hereinafter cited as State High Risk Pools.)

17 The requirement that creditable coverage immediately precede the application appears in IRS guidance; it is not explicit in the statute. Even so, IRS guidance explicitly allows for preexisting condition exclusions to be imposed if the individual has less than three months of creditable coverage.

18 U.S. Department of Labor, Employment and Training Administration, Advisory System, Training and Employment Guidance Letters No. 05-03 and No. 16-02.

19 67 Federal Register 66674, November 2, 2002.

20 The requirement for individual coverage prior to job loss does not apply to individual coverage under a state-qualified health plan.

21 For updated links to state-qualified health plans, see http://www.irs.gov/individuals/content/0,,id=187058,00.html#stateLinks.

22 National Emergency Grants were first authorized by the Workforce Investment Act of 1998 (P.L. 105-220). In general, they support employment and training assistance to workers who lost their jobs due to layoffs or plant closings, and temporary jobs for workers affected by natural disasters.

23 See State High Risk Pools. These state high risk health insurance pools are different from the temporary high risk pools that were established under the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148, as amended). For additional information about the temporary high risk pools established under health reform, see CRS Report R41235, Temporary Federal High Risk Health Insurance Pool Program.

24 See "Participation and Administrative Costs."

25 U.S. Government Accountability Office, Trade Adjustment Assistance: Most Workers in Five Layoffs Received Services, but Better Outreach Needed on New Benefits, GAO-06-43, January 2006.

26 S. Dorn and T. Kutyla, "Health Coverage Tax Credits Under the Trade Act of 2002: A Preliminary Analysis of Program Operation," The Commonwealth Fund, April 2004, at http://www.commonwealthfund.org/usr_doc/721_Dorn_taxcredits_tradeact2002.pdf?section=4039.

27 For example, the Health Insurance Portability and Accountability Act (HIPAA, P.L. 104-191) generally prohibits health plans from imposing preexisting condition exclusions for individuals who previously had 12 months of continuous creditable coverage; for the HCTC, the time period is reduced to three months.

28 For example, see the National Alliance on Mental Illness, "Public Policy Platform," November 2006, at http://www.nami.org/; and Families USA study on consumer protections in state managed care laws at http://www.familiesusa.org/assets/pdfs/hitmiss64e2.pdf.

29 For example, see the statement of K. Pollitz in U.S. Congress, House Committee on Ways and Means, Hearing on Promoting U.S. Worker Competitiveness in a Globalized Economy, June 14, 2007, link to testimony available online at http://waysandmeans.house.gov/Hearings/transcript.aspx?NewsID=10288.

30 S. Dorn, et al., "Limited Take-up of Health Coverage Tax Credits and The Design of Future Tax Credits for the Uninsured," Economic and Social Research Institute, November 3, 2005, p. 6, at http://www.esresearch.org/documents_1-05/HCTC_TakeUp.pdf.

31 S. Dorn, "Take-Up of Health Coverage Tax Credits: Examples of Success in a Program with Low Enrollment," Urban Institute, December 2006, at http://www.urban.org/UploadedPDF/411390_Take-Up_of_Health.pdf.

32 Ibid.

33 From 2003 through 2008, total HCTC-related costs were comprised of the cumulative tax credit amounts provided by the government ($515 million), the share of premiums paid by the HCTC recipients ($277 million), and administrative costs. See "Participation and Administrative Costs."

34 S. Dorn, "Administrative Costs for Advance Payment of Health Coverage Tax Credits: An Initial Analysis," The Urban Institute, March 2007, at http://www.cmwf.org/usr_doc/1017_Dorn_admin_costs_advance_payment_HCTC.pdf.

35 See "Participation and Administrative Costs."

36 The statutory amendments listed in this section technically extended HCTC program changes that were initially made under the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) and temporarily extended under the Omnibus Trade Act of 2010 (P.L. 111-344). For simplicity's sake, this report's description of the HCTC program incorporates the latest statutory changes enacted under P.L. 112-40 to the program.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
Copy RID