The premium tax credit (PTC) is a refundable credit that assists individuals and families in paying for health insurance obtained through a Marketplace established under the Affordable Care Act. Recent COVID relief legislation (the 2021 American Rescue Plan Act, or ARPA) made several significant enhancements to this credit. We are still waiting for additional guidance, but here is an overview of these changes.
Taxpayers with Household Income Over 400% of FPL Made Eligible for PTC
Under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) weren't eligible for the PTC.
Under ARPA, for 2021 and 2022, the PTC is available to taxpayers with household incomes that exceed 400% of the FPL. This change will have the effect of increasing the number of people who are eligible for the PTC.
Illustration: A 45-year-old single individual with income of $58,000 (450% of FPL) in 2021 wouldn’t have been eligible for the PTC under pre-ARPA law. Under ARPA, that individual is eligible for a PTC of about $1,250.
New Percentage Tables Will Increase PTC for 2021 and 2022
The PTC is computed on a sliding scale based on household income, expressed as a percentage of the federal poverty line (FPL). The amount of the PTC is limited to the excess of the premiums for the applicable benchmark plan over the taxpayer's required share of those premiums.
The required share comes from a table that is divided into income tiers.
Because the required share is less under the new tables for 2021 and 2022 than it otherwise would have been, the PTC will be greater. Under pre-ARPA law, a taxpayer might have had to spend as much as 9.83% of household income in 2021 on health insurance premiums. Under ARPA, that amount is capped at 8.5% for 2021 and 2022.
Illustration: Under pre-ARPA law, a 21-year-old with income at 150% of FPL in 2021 would have been eligible for a PTC of about $3,500. Under ARPA, that individual’s PTC will be about $4,300.
Premium Tax Credit Increased for Taxpayers Receiving Unemployment Compensation in 2021
If you receive, or are approved to receive, unemployment compensation for as little as one week during 2021, you qualify for special PTC rules for the entire year. Under these rules:
You are automatically treated as an “applicable taxpayer” who qualifies for the PTC. You still won’t be able to claim the PTC, however, if you are eligible for affordable employer-sponsored insurance.
Your household income in excess of 133% of the FPL for a family of the size involved isn’t taken into account in figuring your PTC.
As a result of the second rule, if your household income for 2021 exceeds 133% of FPL, your PTC will be calculated as if the income was 133% of FPL. This will increase your PTC, since your required share of the premiums will be lower.
No Repayment of Excess Advance PTC Payments for 2020
Many taxpayers arrange to have advance payments of their PTC made in advance directly to the insurer. The amount of these payments is based on income estimated from tax returns for prior years.
If your actual PTC turns out to be more than the advance payments, you will receive a refundable income tax credit for the excess. But if your advance payments exceed your PTC, you generally must pay back the excess as additional income tax, subject to a repayment cap based on your household income.
However, a special rule applies for 2020 under ARPA. Under that rule, if you file a 2020 return reconciling your advance PTC payments with your actual PTC, no additional income tax will be imposed if the advance payments are greater. You can retain the benefit of the advance payments even though they exceed the PTC to which you are entitled.
Note: Currently, the IRS is telling taxpayers who’ve already filed 2020 returns and paid the excess credit back as additional tax not to file amended returns to claim a refund. The IRS has said it will provide more details on how to claim a refund of additional tax soon.