by George G. Jones and Mark A. Luscombe
Tax credits have become a very popular Congressional tool, in recent years, to achieve various social policy goals through the tax law. The number of refundable tax credits, however, is still relatively low.
Refundable tax credits are generally designed to insure that the social policy goal that Congress is trying to achieve has the desired result among taxpayers at the lowest income levels, as well as among more highly paid taxpayers. The earned income credit and elements of the child tax credit are the two primary existing examples of this type of social engineering through the Internal Revenue Code.
With the enactment on Aug. 6, 2002, of the Trade Act of 2002, we have a new refundable tax credit in the code. This advanceable, refundable credit - awkwardly named the Credit for Health Insurance Cost of Eligible Individuals - is for U.S. workers displaced by jobs that have moved outside the country, to help defray the cost of their health insurance.
Both the earned income credit and the child tax credit have been difficult to administer, and their complexities have often been a problem for taxpayers who are least able to afford professional assistance. This new credit, while offering meaningful assistance to displaced workers, appears likely also to greatly add to the complexity of tax returns for those seeking to claim its benefits.
Code Section 35
New Code Section 35 (the old Code Sec. 35 has been redesignated as Code Sec. 36), provides a credit equal to 65 percent of the amount paid by a taxpayer for coverage of the taxpayer and qualifying family members for qualified health insurance during eligible coverage months. Key issues in applying this new credit will be determining those taxpayers who fall into the eligible category, which forms of health insurance qualify and their periods of eligibility.
An eligible coverage month is defined as any month if, as of the first day of that month, the taxpayer is an eligible individual, is covered by qualified health insurance (premium paid by the taxpayer), does not have other specified coverage and is not presently in prison.
A taxpayer is an "eligible individual" if he or she falls into one of three categories. The first category includes individuals receiving a trade readjustment allowance under chapter two of title II of the Trade Act of 1974 for any day of a particular month of eligibility. The second category includes eligible alternative trade readjustment allowance recipients under section 246(a)(3)(B) of the Trade Act of 1974, participating in the program established under section 246(a)(1) of the 1974 Act, and receiving a benefit for the particular month under section 246(a)(2) of the 1974 Act. The third category includes any individual who has attained the age of 55 as of the first day of the month in question and is receiving a benefit for such month that any portion of which is being paid by the Pension Benefit Guaranty Corporation under title IV of ERISA.
The Joint Committee on Taxation has estimated that the cost of the credit for taxpayers in the first two categories is $122 million in 2003 and $2.757 billion over 10 years. The cost of the credit for PBGC pension recipients is estimated to be $172 million in 2003 and $2.051 billion over 10 years. The JCT also highlights what portion of the cost is due to the refundable element, as opposed to the tax reduction element. The cost of the refundable feature for individuals in the first two categories is estimated to be $37 million for 2003 and $910 million over 10 years.
The cost of the refundable feature for individuals who are PBGC benefit recipients is estimated to be $52 million in 2003 and $677 million over 10 years.
What constitutes qualified health insurance is also very complicated. COBRA continuation coverage qualifies. Coverage under a group health plan offered by the employer of the individual’s spouse qualifies. Also, individual health insurance can qualify if the individual was covered under the individual health insurance during the entire 30-day period that ends on the date that the individual became separated from the employment that made the individual an eligible individual to begin with.
Individuals would frequently have sufficient notice of impending layoffs to meet the 30-day requirement if they were aware of the requirement and desired to take advantage of it.
The other categories of qualified health insurance relate to various state-sponsored programs, including state-based continuation coverage, a qualified state high-risk pool, health insurance for state employees and comparable insurance programs for others, health insurance arrangements with a state as a party and a state-operated health plan that does not received any federal financial participation.
The new law also describes the requirements for a state to qualify the health insurance programs with which it is associated. Coverage that constitutes only a flexible spending account or similar arrangement or excepted benefits as described in the new law would not constitute qualified health insurance.
Individuals are considered to have other specified coverage, and are, therefore, not eligible, if they are covered under a health plan at least 50 percent of the cost of which is paid by an employer, if they qualify as alternative trade readjustment allowance recipient and are eligible for such employer-paid coverage, or if they qualify for coverage or benefits under certain other programs, such as Medicare or Medicaid.
An eligible coverage month must begin more than 90 days after the date of enactment of the Trade Act of 2002. With an enactment date of Aug. 6, 2002, this means that the first month of possible eligibility for an individual would be December 2002. Tax return preparers will, therefore, have one month of possible eligibility to deal with in the preparation of 2002 returns.
In order to permit laid-off employees to take maximum advantage of this provision, business advisors will want to encourage businesses and employee organizations to make sure that employees are aware of the state health programs that qualify for the credit and to insure that individuals facing impending layoffs, and not qualifying for COBRA continuation coverage, are aware of the ability to put in place individual health insurance at least 30 days prior to separation in order to qualify for these tax benefits.
Otherwise, taxpayers may learn too late that the health insurance that they have obtained does not qualify for the credit, or that it is no longer possible to obtain individual coverage that does qualify.
Although the number of taxpayers affected by this new credit should not be nearly as large as the number affected by the earned income credit or the child tax credit, this new refundable credit promises to add another level of complexity to the return preparation process, which will be an especially difficult problem for those taxpayers least able to afford professional assistance.
