Q: Tax Playa, what is the health coverage tax credit, and am I eligible for it?
Joe, Fairfax VA
A: The Health Coverage Tax Credit (HCTC) is a narrowly-applied tax benefit largely for those adversely-affected by free trade agreements. It is intended to help ease the impact locally of free trade agreements that benefit the economy generally. It falls under the old principle, "protect the worker, not the job"...
There are four elements to consider when looking at the HCTC: eligibility, qualified health plans, ways to claim it, and responsibilities of claimants.
There are three types of people eligible to claim the HCTC:
- Persons receiving Trade Adjustment Assistance provided by the federal government via state unemployment offices (which means your area has been adversely-affected by a free trade agreement);
- Workers at least age 50 receiving Alternative Trade Adjustment Assistance;
- Retirees at least age 55 receiving benefits from the Pension Benefit Guarantee Corporation (which means that your old employer's pension has become insolvent).
Even if you satisfy the above criteria, you generally cannot be covered by (or be eligible for coverage under) alternative health insurance options, be a dependent, or be in prison.
Qualified Health Plans
Not all health insurance plans qualify for subsidy under the HCTC. Eligible plans include:
- COBRA extended plans (health insurance you can pay 100% of the cost of yourself for up to six months after losing your job)
- Individual market health insurance
- Spousal health insurance if her employer pays less than 50% of the cost
- Other health insurance plans deemed qualified in your state
Claiming the HCTC
The HCTC pays for 65% of health insurance premiums for qualified individuals. There are two ways to claim the HCTC:
- In Advance. If you are eligible and enroll in a qualified plan, you can arrange to have the IRS reimburse your insurance provider with the HCTC. At tax time, you will receive a 1099-H reporting the amount paid.
- On Your Tax Return. If you didn't receive advance HCTC payments (or only received advanced payment for some eligible months), you file Form 8885 with your tax return.
Responsibilities of HCTC Recipients
There are five primary responsibilities of HCTC recipients:
- Pay the remaining 35% of the cost of your health insurance
- Remain in good standing with your health insurance provider
- Submit and keep supporting documentation as needed
- Update the HCTC program of changes
- Understand your eligibility criteria in case your situation changes