How the Health Care Tax Credits Worked

The Health Care Tax Credit made health insurance more affordable for some groups, until it expired to make way for the Affordable Care Act.
The Health Care Tax Credit made health insurance more affordable for some groups, until it expired to make way for the Affordable Care Act.
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The Health Care Tax Credit (HCTC) was a federal program in existence from 2002 to 2013 that assisted people who had lost their jobs or were forced to take pay cuts "due to the effects of international trade" [source: Department of Labor]. The HCTC was created as a part of the Trade Adjustment Assistance Reform Act of 2002 (otherwise known as the Trade Act of 2002). The program was expanded and extended a number of times until it finally expired on Jan. 1, 2014, to make way for the tax credits offered by the Affordable Care Act. The last year to claim the HCTC was 2013.

The HCTC paid 72.5 percent of the health care premiums for those who qualified for the program. To be eligible for the HCTC, you had to receive government assistance through a Trade Adjustment Assistance program or the Pension Benefit Guaranty Corporation (we'll explain these programs on the next page). Family members of eligible HCTC recipients could also qualify for the credit. And the credit wasn't available with just any old type of health coverage — your health plan also had to meet certain requirements.

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At first the HCTC was a yearly credit, but it became available on a monthly basis in August 2003. The HCTC was an advanceable, refundable credit, which means that you didn't have to wait until you filed taxes to get the credit — if you chose, the HCTC program would pay your insurer directly every month when your premium was due. If you chose to wait until tax time to receive the HCTC, it would come in the form of credit against the taxes you owed, or as a refund.

Who qualified for the HCTC, and how did they receive their benefits? Head to the next page to find out.

Who Qualified for Health Care Tax Credits?

It was a very specific group of people that qualified for the Health Care Tax Credit. There were two eligibility categories: candidate requirements and general requirements. The candidate requirements laid out exactly who could receive the credit, and the general requirements specified the types of health plans that the government deemed "qualified."

To qualify for the HCTC, you had to be already receiving assistance through one of two government programs:

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  • The Trade Adjustment Assistance (TAA), Alternative TAA (ATAA) and Reemployment TAA (RTAA) programs help workers who have lost jobs or have taken a pay cut because of foreign trade --usually because their jobs have been shipped overseas. Among other things, the programs provide paid training, job search assistance and Trade Readjustment Allowances. If you were part of a TAA program, you were eligible for the HCTC.
  • The Pension Benefit Guaranty Corporation (PBGC) provides pension benefits for retired employees of companies that can no longer financially offer those services, usually because of bankruptcy. Anyone 55 or older who was receiving assistance through the PBGC could also qualify for the HCTC (have we given you enough acronyms to keep track of?).

You were NOT eligible for the Health Care Tax Credit if:

  • You were enrolled in a Medicaid or Medicare plan.
  • You were in prison.
  • You could legally file as someone else's dependent (but if one of your dependents was enrolled in CHIP (Children's Health Insurance Program), you could still take the HCTC).

Once you met these requirements, your health plan also had to meet certain conditions. Read on to find out what those were.

What Kinds of Plans Qualified for Health Care Tax Credits?

The other part of the eligibility equation was the "qualified health plan." If you met the first set of requirements, you could receive the HCTC only if you had one of these types of health plans:

  • COBRA insurance offered through a former employer
  • A state-qualified health plan that met the Trade Act of 2002's consumer protection requirements
  • Certain plans offered through a Voluntary Employees' Beneficiary Association (VEBA), which are set up by financially distressed companies to provide benefits. VEBAs are usually created because of a class-action lawsuit, collective bargaining agreement or bankruptcy settlement.
  • Spousal coverage through any one of these types of plans

For COBRA and certain other employer-sponsored plans, you had to be responsible for 50 percent or more of your monthly premium to qualify for the tax credit. And your portion of the premium had to be paid in after-tax dollars -- if your insurance premiums came out of your pre-tax paycheck, for example, you couldn't also get the tax credit. That would be a double benefit, which the IRS obviously does not advocate.

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Starting in August 2003 (a year after the act passed), you could choose to take your HCTC on a yearly or monthly basis. If you picked yearly, you'd have to file federal Form 8885 with your taxes and wait for a refund check or for the credit to be applied to your tax bill. Monthly recipients would fill out Form 1099-H and the HCTC program would send 72.5 percent of the premium directly to the insurer every month.

The Affordable Care Act introduced strictly income-based tax credits in 2014, so the Health Care Tax Program became obsolete. To find out more about the Affordable Care Act and taxes in general, check out the links on the next page.

Author's Note: How the Health Care Tax Credits Worked

I'm not sure how many were helped by the HCTC over the decade of its existence, but I'm glad the Affordable Care Act greatly expanded the number of people who could receive assistance with their health insurance premiums.

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Sources

  • Internal Revenue Service. "HCTC: Eligibility Requirements and How to Receive the HCTC." (Nov. 17, 2014) http://www.irs.gov/Individuals/HCTC:-Eligibility-Requirements-and-How-to-Receive-the-HCTC
  • Internal Revenue Service. "HCTC: Glossary of Common Terms." (Nov. 17, 2014) http://www.irs.gov/Individuals/HCTC:-Glossary-of-Common-Terms
  • Internal Revenue Service. "HCTC: Information for Yearly Filers." (Nov. 17, 2014) http://www.irs.gov/Individuals/HCTC:-Information-for-Yearly-Filers
  • Internal Revenue Service. "HCTC: Latest News and Background." (Nov. 17, 2014) http://www.irs.gov/Individuals/HCTC:-Latest-News-and-Background
  • Internal Revenue Service. "HCTC: Qualified Health Plan Requirements." (Nov. 17, 2014) http://www.irs.gov/Individuals/HCTC:-Qualified-Health-Plan-Requirements
  • United States Department of Labor. "Consolidated Omnibus Budget Reconciliation Act (COBRA)." (Nov. 17, 2014) http://www.dol.gov/elaws/ebsa/health/employer/C19.htm
  • United States Department of Labor. "What is Trade Adjustment Assistance?" June 22, 2012. (Nov. 17, 2014) http://www.doleta.gov/tradeact/factsheet.cfm
  • Wells Fargo. "An introduction to VEBAs." (Nov. 17, 2014) https://www08.wellsfargomedia.com/downloads/pdf/com/retirement-employee-benefits/insights/understanding-veba.pdf