IRS rejects more generous PPACA tax credit

(Bloomberg) — An effort to allow looser rules for calculating whether workers will be eligible for U.S. subsidies to buy health insurance was rejected Thursday by the Internal Revenue Service.

Employees can receive government tax credits to buy insurance for their families if the coverage their employers offer would cost more than 9.5% of their income, the IRS said Wednesday in final regulations. That calculation will be based on the cost of single coverage, not family coverage, which is more expensive and would give more people access to the credits.

Democrats, including U.S. Reps. Sander Levin of Michigan and Henry Waxman of California, had called for the IRS to use the more generous calculation to give families more access to policies on the insurance exchange, or marketplace. In a letter they wrote to the Treasury Department in December 2011, they cited estimates that suggested that more than 2 million people would be affected by 2019.

“The notion that Congress wrote the law in a manner that would exclude many families from access to more affordable coverage in the exchange if their employer offered them family coverage exceeding 9.5% of their household income is simply incongruent,” they wrote. “The effect of this wrong interpretation of the law will be that many families remain or potentially become uninsured.”

The IRS says in a proposed rule also issued Wednesday that most families in such a situation won’t have to pay a penalty to the government if they choose not to buy insurance. Under the Patient Protection and Affordable Care Act, most Americans are required to carry insurance beginning next year, with a maximum penalty of $285 per family or 1% of income if they don’t. The penalty rises to $2,085 or 2% of income by 2016, according to the Kaiser Family Foundation of Menlo Park, Calif.

“It’s a major improvement with respect to protecting families from penalties if they can’t afford health care coverage,” says Ron Pollack, executive director of the consumer advocacy group Families USA. “But it still leaves a significant problem because families that can’t afford health coverage either through an employer or on their own will be unable to get the subsidy help they need.”

The IRS didn’t say how many people are expected to be exempt from the health law’s mandate as a result of the rules, or how many won’t be able to get insurance subsidies.

“There will be a substantial number of families who are priced out of needed health care,” Pollack says.

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