Health Coverage Tax Credit

Farella Braun + Martel has developed an active practice protecting the medical benefits of retired workers.  Using the tools set forth in the US Bankruptcy Code, our teams have represented retired workers in the airline, automotive, manufacturing and public sectors of the US economy to protect their benefits, salaries and retirement programs.  Farella is the only law firm experienced under the new provisions of the American Recovery and Reinvestment Act (ARRA) in creating a Voluntary Employee Beneficiary Association (VEBA) trust to provide federal Health Coverage Tax Credit (HCTC)-eligible benefits.  

The HCTC is a tax benefit for retirees whose pensions have been turned over to the Pension Benefit Guaranty Corporation (PBGC), and who are between the ages of 55 and 65.  This includes a large number of union (and nonunion) workers in industrial and transportation sectors of the economy, including steel, auto parts and airlines.  For workers who meet these criteria, the HCTC is a potential source for a significant subsidy for health insurance coverage.

The HCTC is an unusual tax credit-under the IRS advanced payment program the HCTC currently (in 2010) pays 80% of a retiree's health care premiums on a monthly basis.  Unlike most tax credits, there is no need to wait to apply for the credit at the end of the year.  The tax credit is made available on an ongoing basis to pay covered health insurance costs. 

Recent changes to the HCTC make it more attractive and easier to attain a federal tax subsidy.  Two major changes were put in place in February 2009, as part of the ARRA:

  1. For at least two years, through the end of 2010, the federal subsidy was increased from 65% to 80% of the benefit cost. (Pending legislation would extend that increase.)
  2. ARRA provisions made it easier to obtain an HCTC-eligible benefit. A benefit delivered through a voluntary employee benefit association (VEBA) is eligible as "qualifying coverage" as long as (A) the VEBA was set up by a bankruptcy section 1114 retiree committee or union representing retirees; or (B) the VEBA is authorized by the order of a bankruptcy judge.

By allowing bankruptcy judges to authorize a VEBA for HCTC purposes, Congress greatly simplified the process for setting up a VEBA.  Previously, any party that wanted to qualify for the HCTC had to obtain a private letter ruling from the IRS.  Now, the VEBA can be set up as part of the bankruptcy process, or even after bankruptcy proceedings have been completed, by making an application to the bankruptcy court.  In the Delphi bankruptcy, where Farella represented the salaried retirees committee, we secured an order from the bankruptcy judge and the VEBA we set up rolled out an HCTC-eligible benefit.  According to the IRS, this was the first time the new ARRA provisions had been used to get retirees the HCTC subsidy.