Guidance on Reconciling the Tax Credit, COBRA Subsidies Under the American Bailout Plan

Guidance on Reconciling the Tax Credit, COBRA Subsidies Under the American Bailout Plan

Relief From Premium Tax Credit Reconciliation For 2020 Most marketplace enrollees opt to receive their PTCs in advance, which lowers the amount they must pay each month throughout the plan year. The amount of advance PTC is based on an individual’s projected income when they apply for coverage. Then, at tax time, individuals “reconcile” the amount of advance PTC they received (based on estimated income) with their actual income (based on federal income data). Individuals do this by completing Form 8962 when they file their taxes. If actual income is higher than estimated, they may be required to repay all or part of the advance PTC to the federal government. This “clawback” results in a smaller tax refund or a larger balance owed to the IRS.

Recognizing the challenges with predicting income in 2020, the American Rescue Plan prevents those who underestimated their income from having to repay excess PTC. People may have received extra income due to, say, unexpected hazard pay for essential workers, extra shifts to cover for coworkers who were out sick or in quarantine, or unemployment benefits. By waiving this clawback requirement, there is no repayment requirement for tax year 2020. The American Rescue Plan thus holds consumers (at all income levels) who received ACA subsidies harmless from income fluctuations in 2020. Guidance On COBRA Subsidy

It is worth emphasizing that the PTC reconciliation process is unchanged for those whose income was lower than estimated or who did not receive some or all PTC in advance. Thus, if you thought your income would be higher than it ultimately was, you may be owed money from the government in PTC. By completing Form 8962, you can claim this net PTC and your tax refund for 2020 will be higher (or the amount you owe in taxes will be lower). If you are owed PTC, the IRS may send a letter asking for a missing Form 8962 or for more information to process your refund. COBRA continuation coverage stems from the Consolidated Omnibus Budget Reconciliation Act of 1986 which requires group health plans to temporarily continue group health coverage that otherwise might be terminated for qualifying individuals. This includes covered employees, spouses, former spouses, and dependent children. COBRA applies to employers with 20 or more employees, and many states have extended similar protections for smaller employees (i.e., employers with less than 20 employees). These state laws are often referred to as “mini-COBRA” laws.

Those who already have filed their 2020 tax return (both with or without Form 8962) should not file an amended tax return or contact the IRS. Instead, the IRS will ignore Form 8962 when processing the tax return or adjust the amount owed by setting it to $0. No action is needed from the tax filer, and tax filers should disregard any letters about excess advance PTC for 2020. Those who already paid the amount owed in excess advance PTC will be reimbursed and should not file an amended tax return. Doing so is unnecessary, and the IRS expects to soon issue more details on its reimbursement process. The IRS issued guidance on this on April 9. Those who owe excess advance PTC (because their income was higher than expected) do not need to complete Form 8962 or report excess advance PTC when filing 2020 taxes. The IRS will process tax returns without this form and reduce any amount that would have been owed in excess advance PTC to $0.

The American Rescue Plan temporarily addresses this affordability challenge by fully subsidizing COBRA premiums for workers who are laid off or have reduced hours. Qualifying individuals will not have to pay premiums (or administrative fees) for COBRA continuation coverage. The subsidy became available on April 1 and extends through September 30, 2021. While an important option for many people, enrollment in COBRA continuation coverage is often low because the individual is responsible for paying up to 102 percent of the cost of premiums for the group health plan. This cost—of full group health plan premiums without any employer contribution—is prohibitively expensive for many people.

The COBRA subsidy is available for any group health plan sponsored by an employer, union, or state or local government that is subject to COBRA. It is also available to those enrolled under state mini-COBRA laws. The employer or plan will pay the COBRA premiums and then receive a payroll tax credit for the amount of premium assistance provided. Employers or plans that fail to provide the COBRA subsidy may be subject to a tax of up to $100 per qualified beneficiary (no more than $200 per family) for each day of violating these requirements. There are some restrictions on who qualifies for the COBRA subsidy. First, it is only available to individuals or family members who qualify for COBRA coverage because they have ben involuntarily terminated or had their hours reduced. A reduction in hours may be caused by a change in an employer’s hours of operations, a shift from full- to part-time status, a temporary leave of absence, or participation in a lawful labor strike. Importantly, people who qualify for COBRA continuation coverage for other reasons (such as a divorce) are not eligible for the COBRA subsidy and must pay full premiums. And those terminated for gross misconduct do not qualify for COBRA coverage or the subsidy. Subsidy Eligibility

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