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The latest ACA advancement to be introduced by the Biden administration comes via the American Rescue Plan and applies to the use of Advanced Payments of Premium Tax Credits (APTCs) and Premium Tax Credits (PTCs).
Specifically, the IRS announced that recipients of PTCs will not be required to pay back the excess APTCs for the 2020 tax year. In order to understand how this impacts U.S. taxpayers, it is important to know the difference between an APTC and a PTC.
What is an Advanced Payment of the Premium Tax Credit?
Sometimes referred to as “advance credit payments,” APTCs are essentially tax credits that certain eligible Americans can claim and apply to the cost of their monthly health coverage premiums. The credit is sent directly to an individual’s healthcare coverage insurance provider in advance of when the monthly premium is due.
The IRS notes that individuals can “choose to not get APTC, pay the full amount of their monthly premium, and claim all the benefits of the PTC that they are allowed when they file their tax return.” Choosing to take this approach will reduce the amount of tax an individual will owe or increase their refund.
What is a Premium Tax Credit?
Premiums Tax Credits are refundable subsidies designed to help individuals and families with low or moderate income afford health insurance purchased through a state or federal health exchange. Only qualified plans in the individual market through either a state or federal health exchange allow PTCs.
The main difference between APTCs and PTCs is how they are applied. With Advanced Payment Premium Tax Credits, individuals can choose to have all or some of the APTC paid in advance toward a monthly medical premium. Premium Tax Credits, on the other hand, are applied at the end of a specific tax year.
The latest IRS announcement reiterates that under Biden’s American Rescue Plan, the requirement for taxpayers to repay excess APTCs for the 2020 tax year is suspended.
COVID Tax Tip 2021-55, issued April 22, provides instructions on how individuals that received APTC during the 2020 tax year should proceed. Specifically, the IRS says individuals will need to compare:
- The amount of Premium Tax Credit paid in 2020 to the Marketplace on their behalf in advance and
- The actual Premium Tax Credit they qualify for based on their final income for 2020
The IRS adds that “if the taxpayers’ APTC was less than their allowable PTC, they can claim the difference on their 2020 tax return as a net PTC by including Form 8962 with their tax return. The IRS needs the information on the form to process the tax return for taxpayers. If a taxpayer claims a net PTC and they receive a letter asking for more information, they should respond to the notice so that the IRS can finish processing their 2020 tax return and, if applicable, issue any refund due.”
For information on certain situations relating to APTC repayment, reporting excess APTCs, and IRS correspondence, head to the official IRS page on Premiums Tax Credits.
Employers should remember that the American Rescue Plan also expands PTC eligibility to include Americans whose household income is beyond 400% of the Federal Poverty Level, in addition to capping the maximum monthly contribution towards healthcare coverage obtained through a state or federal health exchange to 8.5%.
That move will likely garner a significant increase in the number of PTCs issued. As a reminder, any employer that has an ACA full-time employee who receives a PTC from a state or federal health exchange will cause the IRS to issue penalty assessments for ACA Employer Mandate non-compliance.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), organizations with 50 or more full-time employees and full-time-equivalent employees, are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is affordable for the employee, or be subject to) IRC Section 4980H penalties.
The IRS is currently issuing ACA non-compliance penalties via Letter 226J for the 2018 tax year, and penalty notices for previous reporting years are also within the agency’s scope, as it recently announced that there are no statute of limitations with regards to ACA penalties. And with the IRS increasing its enforcement efforts of the ACA, employers should approach ACA compliance with caution and attention to detail.
Best practices for relieving IRS risk with regard to ACA penalty assessments includes documenting all offers of coverage, as well as health plan information that demonstrates affordability. Download the 2021 ACA 101 Toolkit for more helpful information on how to prepare for IRS audits and ACA best practices.
If your organization has received IRS Letter 226J, download our white paper on Letter 226J to learn best practices for responding to the penalty notice.