02/26/10 - "The IRS Helps PBGC Recipients Pay for Healthcare"

By: John Pitlosh CFP®, MST

Here is a headline you don’t expect to hear…”The IRS is helping certain individuals by paying up to 80% of their healthcare premiums in 2010”.

Most people have never heard of the Health Coverage Tax Credit (HCTC), but if you are between the ages of 55 and 65 and your pension was taken over by the Pension Benefit Guarantee Corporation (PBGC), you should.  According to the IRS, more than 350,000 Americans are potentially eligible to benefit from this program, however, most people don’t even know it exists.

Background:

The HCTC is a federally funded tax credit that was started back in 2002 to assist PBGC recipients and trade-affected workers that were eligible for trade adjustment assistance.  While the program was slated to end in 2008, the credit was extended through the end of 2010 by the 2009 American Recovery and Reinvestment Act, which is known to everybody else as “the Stimulus Bill”.  In addition to extending the date for credit eligibility, the bill also increased the amount of assistance from 65% to 80% of qualified health care coverage.

The HCTC is a refundable tax credit that covers 80% of qualified healthcare premiums.  The credit is paid in full no matter how much federal income tax a recipient owes. The HCTC can be coordinated to pay your healthcare on a monthly basis or you can cover the expense out of your own pocket and receive the credit by filing Form 8885 at the end of the year with your taxes.

PBGC Eligibility for the HCTC

While this is not an exhaustive list, to be eligible for the HCTC benefit you need to meet 3 basic requirements:

1)       You need to be receiving your pension from the PBGC.  You are still eligible if you received a lump sum payment for your pension after August 5^th 2002.

2)       You need to be 55 or older and not enrolled in Medicare.

3)       You need to be enrolled in a qualified health plan and paying more than 50% of the premiums.

What is a Qualified Health Plan

Other types of health plans may be covered, but the 3 main categories of health plans that meet the requirements of a qualified health plan include:

1)       COBRA Healthcare Plan – If you lose your job, you get the option to continue on with your former employer’s healthcare plan for a specified time frame.  COBRA is just the name of the federal legislation that requires your former employer to continue offering job-based health coverage to you if you lose your job or run into other qualifying events that cause you to lose your health insurance. You can qualify for the credit if you pay more than 50% of your COBRA premium and you don’t receive a 65% premium reduction.  For most people that are continuing their healthcare through their former employer this isn’t a problem.

2)       State-Qualified Health Plan – These are non-employer based health plans that a state's Department of Insurance approves as meeting the Trade Act of 2002's Consumer Protection requirements for the HCTC.  The IRS has a link to the plans offered in all 50 states on their website.  The providers can vary considerably across the states.  Florida relies on Blue Cross and Blue Shield, while New York has a pretty exhaustive list of providers that meet their criteria.

3)       Spousal Coverage – Spousal Coverage is group health insurance that is available to you through your spouse’s current or former employer.  If you and your spouse pay more than 50% of the cost of the spousal coverage, then you are eligible for the credit.  However, you need to be aware that any portion of the spousal coverage that is paid using pre-tax contributions of your spouse is classified as being paid by the employer.

Who does the credit cover?

In addition to the PBGC recipient, the credit will also cover family members if they meet the same general requirements and they are your spouse or someone you can claim as a dependent on your federal tax return.  In order to qualify, the family member must also be covered under the same qualified health plan as you or under a separate qualified health plan.  Another big change added to the program by the Recovery Act was the availability of the program to the family members after the PBGC recipient enrolls in Medicare, dies, or gets divorced for another 24 months.  Keep in mind that credit is only funded through the end of 2010, so any benefit beyond that will require action by Congress to extend the credit.  As a result, the 24 months may be cut short.

Summary:

Pension recipients from companies like Bethlehem Steel, United Airlines, Eastern Airlines, Pan Am, Nortel Networks, Lehman Brothers, Circuit City, and Delphi Automotive are all too familiar with the reality of their companies filing for bankruptcy and dumping their pension obligations onto the PBGC.  The reduction in benefits that is typically associated with a PBGC take over can make it difficult for families to afford health insurance at a critical point in their lives.  Through the “friendly” arm of the IRS, Congress is looking to ease the burden on these families by creating and funding the HCTC program.  Even though the program is currently funded with $100 million and is already assisting 28,000 workers, a large contingent of eligible participants aren’t even aware the program exists.  If you want to learn all the details about the program go to the IRS website and search “HCTC”.

 

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