COBRA and the Health Coverage Tax Credit

The health coverage tax credit can alleviate financial health care coverage burdens, such as COBRA, for some displaced workers by refunding some of what they paid toward the health coverage.

 

How Does it Work?

The health coverage tax credit helps people pay for items associated with health coverage, such as prescription-only coverage, major medical coverage, mental health coverage, hearing coverage, and substance abuse coverage, or coverage like COBRA, insurance extended to you after you leave your job. The tax credit can cover up to 80 percent of the eligible premiums.

 

The American Recovery and Reinvestment Act of 2009 gives a 65 percent federal subsidy to qualified COBRA participants to cover their COBRA premiums up to 15 months. If you qualified for COBRA coverage between September 1, 2008 and February 28, 2010, you may be able to take advantage of this credit. The tax credit only applies to workers (along with their families) involuntarily terminated, including laid off, or who lost work hours that included the loss of health insurance benefits.

 

To determine your eligibility for the health coverage tax credit, see if you fit the requirements below.

 

Who Is Eligible?

The health coverage tax credit has three requirements that must be met in order to receive the tax credit.

 

One of the following must apply as qualifying and receiving:

  • Under the age of 55 and a pension recipient of Pension Benefit Guaranty Corporation. (PBGC recipients are determined eligible for HCTC by the PBGC itself: phone 1-800-400-7242.)
  • A wage subsidy for older workers under the Alternative TAA program or Reemployment Trade Adjustment Assistance (RTAA).
  • Trade Readjustment Allowances (TRA). (After February 2009, course attendance is not required, provided you’re in a break from training or receiving unemployment compensation.)
  • Unemployment Insurance (UI) benefits while otherwise eligible for TRA.

 

All must apply for each month you wish to claim the tax credit:

  • You aren’t serving a prison sentence.
  • You aren’t receiving Medicare benefits or entitled to them.
  • Another person can’t claim you as a dependent on their tax return.
  • You aren’t receiving health coverage through the military health system (not including Veterans Affairs benefits).

Enrollment in a qualified health plan, such as:

  • A state-qualified health plan, which is any plan approved by a state's Department of Insurance that meets requirements for the Trade Act of 2002.
  • COBRA, which is insurance extended from your former job-based health coverage. (If you’re already receiving the COBRA Premium Reduction, introduced in February 2009 and which pays 65% of COBRA premiums to eligible laid-off workers, you are not eligible.)
  • Spousal coverage, which is health insurance provided through your spouse's employer, and that which your spouse pays more than 50% of the cost to cover you.
  • Non-group / individual health plan, which is private health insurance sold by a health insurance company to one family or individual at a time.

How Do I Claim the Tax Credit?

Two ways to receive the Health Coverage Tax Credit reimbursement are:

  • Claim the HCTC on your yearly tax return, or
  • Register to receive the HCTC as a monthly payment to your insurance plan.

If you’d like to claim the credit, you will need to complete Form 8885. Attach this form to your Form 1040 or Form 1040A when you file your taxes.

For more information, see the IRS Health Coverage Tax Credit Overview.

 

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