Consolidated Omnibus Budget Reconciliation Act (COBRA) plan administrators seeking to better understand how the Health Coverage Tax Credit (HCTC)—including its advance payment system and how it will impact COBRA coverage and documentation—may find useful a new report issued by Treasury Inspector General for Tax Administration (TIGTA), as well as corresponding Internal Revenue Service (IRS) recommendations. This column summarizes the key findings from the 23-page report and explains the next steps that plan administrators should consider.
Overview of the HCTC
The HCTC was originally created in 2002 to aid workers displaced by trade-related shifts in employment. It was specifically constructed to help workers who were unduly harmed by imports or production shifts to a foreign country, as well as pension recipients who had their plans terminated after their employers suffered trade-induced financial stress.
Assuming full eligibility, the HCTC provided a certain percentage of qualified health insurance premiums to compensate workers for their trade-based financial losses. From 2002 until the credit’s expiration in 2013, the tax credit fluctuated in size; however, at the time of the credit’s expiration, the credit represented 72.5% of private insurance premiums.
The Trade Preferences Extension Act of 2015 (the Trade Act) reinstituted the HCTC, which will remain available through the end of 2019.
There are three ways for an individual to qualify for the HCTC tax credit: (1) as a trade adjustment assistance (TAA) recipient, alternative TAA recipient, or reemployment TAA recipient; (2) as an eligible Pension Benefit Guaranty Corporation (PBGC) recipient; or (3) as a family member of an otherwise eligible recipient who is deceased or has been subject to finalized divorce proceedings with the requesting individual.
The HCTC program also requires that applicants carry qualified health insurance, which includes COBRA coverage or spousal coverage if the employer does not pay the majority of the cost of coverage.
The HCTC, in its renewed form, does not differ substantially from its previous iteration. The IRS has been clear that plans that qualified for the HCTC before 2014 would also qualify for the tax credit through 2019. Furthermore, the HCTC remains a refundable tax credit that covers 72.5% of qualified health plans—the exact same percentage as under the tax credit’s previous iteration. However, for 2016 and 2017, individual insurance coverage purchased through the Marketplace is not recognized as an HCTC-qualified health insurance plan.
The Trade Act also required the IRS to establish a program to make advance payments “on behalf of certified individuals” by June 29, 2016. The TIGTA was tasked with auditing IRS’s program to “assess the effectiveness of IRS’s implementation of an HCTC advance monthly payment system.” On May 22, 2017, TIGTA released its final report on how the IRS had implemented the newly created advance monthly payment process for HCTC.
Mission and Findings of the TIGTA Report
The Trade Act required that the IRS establish an advance monthly payment system to be effective beginning in the summer of 2016. The TIGTA report was generated primarily to assess how well the advance monthly payment process was proceeding and what could be done to make the system more effective.
Unable to meet the mid-2016 deadline, the IRS created an interim procedure to issue advance monthly payments until the permanent system would be available in early 2017. During this interim period, the IRS relied on third-party administrators (TPAs) to verify participant eligibility for the HCTC.
While the IRS was transitioning to a more permanent payment system, it issued $5.8 million in advanced monthly payments on behalf of 1,220 individuals during the latter half of 2016. These interim procedures were buttressed by a vigorous outreach program instituted by the IRS.
The IRS supplemented updates to its website intended to inform interested taxpayers with external communications ranging from notifications to government agencies regarding the retroactivity of the tax credit as well as a campaign to educate the public via articles, databases, electronic mailboxes, and YouTube instructional videos.
Despite its modest payment figures in late 2016, the advance payment system as then constructed contained a key flaw in how HCTC applications were processed. Generally, government agencies—such as the U.S. Department of Labor (DOL) and State workforce agencies—preliminarily identified individuals who were potentially eligible for the HCTC.
However, when investigating the nearly 900,000 individuals identified by the PBGC as potentially eligible to claim the HCTC in 2015, the report found that that 57% of those potential applicants possessed a “characteristic that disqualifies them from claiming the HCTC on their tax returns or receiving the benefit of HCTC advance monthly payments.” The overwhelming majority of these ineligible persons failed to qualify because of the age of the harmed worker.
This finding led to the report’s sole recommendation: that the IRS institute procedures to “ensure that individuals meet HCTC eligibility qualifications, including age, not deceased, and not incarcerated, before adding eligibility indicators to tax accounts.” The IRS agreed with this recommendation and has stated that it plans to request technological changes to the required systematic checks to ensure that taxpayers do not receive eligibility indicators on tax forms if not appropriate.
How Does the TIGTA Report Impact COBRA?
The previous iteration of the HCTC was not widely used, and based on the TIGTA report, it does not appear that its use has materially increased under the current program. The report did not make any recommendations that would materially impact the way plan administrators handle the HCTC credit for COBRA-qualified beneficiaries. Nevertheless, plan administrators with HCTC-eligible employees should take steps to make sure that their plans are properly enrolled to receive direct payments from the IRS:
- Complete IRS Form 3881, ACH Vendor/Miscellaneous Payment Enrollment.The Form 3881 only needs to be completed once, not each time an individual applies for advance monthly payments. Plan administrators do, however, need to recertify enrollment each year.
- In addition to enrolling in the IRS’s advance monthly payment program, also take steps, if necessary, to ensure plan documentation and COBRA notices properly reflect HCTC’s availability. The DOL has not yet updated its model COBRA notices to reflect the new HCTC program.
Damian Myers is an Associate in Proskauer Rose LLP’s Employee Benefits, Executive Compensation, and ERISA Litigation Practice Center, resident in the Washington, D.C. office. He is a contributor to Thompson’s Mandated Health Benefits—The COBRA Guide, and is a contributing author to the 5th edition of The New Health Care Reform Law—What Employers Need to Know (A Q&A Guide).
