Is There a Tax Credit for COBRA Premiums?
Understand the tax implications of your COBRA premiums. Learn about a major expired credit and how to navigate your options for past and present tax years.
A specific tax credit for COBRA premiums was once available through the Health Coverage Tax Credit (HCTC), a federal program designed to make health insurance more affordable for specific groups. This credit could cover a substantial portion of premium costs, including those for COBRA continuation coverage.
However, the legislation authorizing the HCTC expired. As of January 1, 2022, the credit is no longer available for current tax years. This expiration means that individuals paying for COBRA can no longer claim this credit on their federal tax returns for coverage months after 2021, shifting the focus toward other available subsidies.
Eligibility Requirements for the Health Coverage Tax Credit
When the Health Coverage Tax Credit (HCTC) was active, eligibility was restricted to two specific groups. The rules were designed to assist those who lost health coverage due to trade-related job loss or the financial failure of a former employer’s pension plan.
The first group consisted of recipients of Trade Adjustment Assistance (TAA) benefits. TAA is a federal program aiding workers who lose their jobs due to increased imports, and to be eligible for the HCTC, the individual had to be receiving TAA cash benefits, known as Trade Readjustment Allowances.
The other qualifying group included certain individuals receiving pension payments from the Pension Benefit Guaranty Corporation (PBGC). The PBGC is a federal agency that insures private-sector pension plans. To qualify for the HCTC, these PBGC recipients had to be at least 55 years old but not yet eligible for Medicare.
Other conditions also applied. An individual was ineligible if enrolled in programs like Medicare, Medicaid, or CHIP, or if their or their spouse’s employer paid 50% or more of the health insurance premium. Eligibility was determined on a monthly basis.
How to Claim the Credit for Past Tax Years
For individuals who were eligible for the Health Coverage Tax Credit (HCTC) in years prior to its expiration on December 31, 2021, it is still possible to claim it by filing an amended tax return. The document for this action is Form 8885, Health Coverage Tax Credit, which is used to calculate the amount of the credit.
To begin, you must gather proof of the total health insurance premiums paid for the qualifying months. You will also need any Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments, that you received, as these amounts must be accounted for when calculating the final credit.
Once the information is collected, you will complete Form 8885 for the relevant tax year. After completing Form 8885, it must be attached to Form 1040-X, Amended U.S. Individual Income Tax Return. It is important to attach supporting documents, such as premium statements, to your return to substantiate your claim.
Interaction with the Premium Tax Credit
A rule governed the relationship between the Health Coverage Tax Credit (HCTC) and the Premium Tax Credit (PTC). Taxpayers were not permitted to claim both the HCTC and the PTC for the same health coverage in the same month. This required eligible individuals to make a choice between the two credits.
The HCTC covered a flat 72.5% of the premium for qualified health plans, including COBRA. In contrast, the PTC is calculated on a sliding scale based on household income relative to the federal poverty line.
An individual whose income was too high to receive a substantial PTC might have found the HCTC’s coverage more advantageous. Conversely, someone with a lower income might have benefited more from the PTC. This choice was made on a monthly basis, offering flexibility if circumstances changed during the year.
Current Alternatives for Health Insurance Subsidies
With the expiration of the Health Coverage Tax Credit, the primary source of federal financial assistance for purchasing health insurance is the Premium Tax Credit (PTC). This credit helps make health coverage more affordable for individuals and families with moderate incomes who buy their insurance through the Health Insurance Marketplace. Unlike the HCTC, the PTC is broadly available to anyone who meets the eligibility criteria.
The PTC works by lowering the monthly health insurance premium. Eligible individuals can choose to have the credit paid directly to their insurance company in advance, which reduces their out-of-pocket premium costs. Alternatively, they can pay the full premium and claim the entire credit when they file their federal income tax return.
Eligibility for the PTC depends on several factors. A person must purchase coverage through the Health Insurance Marketplace and cannot be eligible for affordable coverage through an employer or a government program like Medicare or Medicaid. The amount of the credit is based on a sliding scale, with more assistance going to those with lower household incomes. For tax years 2023 through 2025, rules have been expanded to allow households with incomes above 400% of the federal poverty line to potentially qualify.