Who Is Eligible for the Health Coverage Tax Credit?

The Health Coverage Tax Credit (HCTC) is a federal tax credit administered by the Internal Revenue Service (IRS) designed to help certain eligible individuals and their families afford health insurance premiums. This credit covers a significant portion of qualified health insurance costs, specifically 72.5% of the premiums.

General Eligibility Requirements

To be considered for the Health Coverage Tax Credit, individuals must meet several foundational criteria that apply regardless of their specific qualifying event. An individual cannot be enrolled in Medicare Part A or B, Medicaid, the Children’s Health Insurance Program (CHIP), or the Federal Employees Health Benefits (FEHB) program. Enrollment in these government-sponsored health programs generally disqualifies an individual from HCTC eligibility. Furthermore, individuals must not be incarcerated at the time of claiming the credit.

Another important general requirement is that the individual cannot be claimed as a dependent on someone else’s federal income tax return. If a qualifying family member is included, they must also meet similar restrictions, such as not being enrolled in Medicare, Medicaid, or CHIP. The person claiming the HCTC, along with any qualifying family members, must be a U.S. citizen or a resident alien.

Eligibility Through TAA or PBGC Programs

The primary pathways to Health Coverage Tax Credit eligibility are through specific federal programs designed to assist workers and retirees. Individuals may qualify for the HCTC if they receive benefits from the Trade Adjustment Assistance (TAA) program, including Alternative TAA (ATAA) or Reemployment Trade Adjustment Assistance (RTAA). The TAA program assists workers who lost jobs or wages due to increased imports or shifts in production, offering benefits like income support and job training.

Receiving certain TAA benefits, such as Trade Readjustment Allowances (TRA), triggers HCTC eligibility. Similarly, individuals receiving pension benefits from the Pension Benefit Guaranty Corporation (PBGC) may also be eligible for the HCTC. The PBGC is a federal agency that protects retirement incomes in private-sector defined benefit pension plans, stepping in to pay guaranteed benefits when a plan fails. Retirees aged 55 to 65 who receive benefits from a PBGC-covered plan are generally considered eligible for the HCTC. Eligibility for the HCTC for both TAA recipients and PBGC payees is determined on a monthly basis, ensuring that the credit is available only when the individual meets the ongoing requirements.

Qualifying Health Coverage

Beyond meeting general eligibility and program-specific criteria, the Health Coverage Tax Credit can only be applied to certain types of health insurance plans. One common type of qualifying coverage is COBRA continuation coverage, which allows individuals to temporarily extend health benefits from a former employer. State-qualified health plans, such as high-risk pools, can also qualify for the HCTC, provided they meet specific state and federal requirements.

Coverage obtained through a spouse’s employer-sponsored group health plan may also qualify under specific conditions. If the eligible individual is covered under their spouse’s plan and the spouse pays more than 50% of the cost with after-tax dollars, this can be considered qualified health coverage. Individual health insurance policies can also qualify, but they generally must have been in effect at least 30 days before the individual’s last paid day of work from the company that made them eligible for TAA or PBGC benefits. It is important to distinguish that the HCTC does not provide health insurance itself but rather helps pay for premiums of existing qualified plans.

How to Claim the Credit

Once an individual determines their eligibility and has qualifying health coverage, the next step involves claiming the Health Coverage Tax Credit. The HCTC can be claimed in one of two ways: either on a monthly basis as an advance credit or yearly as a refundable credit when filing a federal income tax return. For those who choose the monthly advance credit, they typically pay 27.5% of their premium directly, and the IRS pays the remaining 72.5% to their health plan administrator.

Alternatively, individuals can pay 100% of their health insurance premiums throughout the year and then claim the HCTC as a refundable credit when they file their annual federal tax return. To claim the yearly HCTC, individuals must complete and submit IRS Form 8885, Health Coverage Tax Credit, along with their federal income tax return. This form is essential for substantiating the claim and must be accompanied by supporting documentation of premiums paid and eligibility. Details for Form 8885 and submission instructions are available on the IRS website.