[Federal Register Volume 79, Number 144 (Monday, July 28, 2014)]
[Rules and Regulations]
[Pages 43622-43631]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17695]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9683]
RIN 1545-BM23


Rules Regarding the Health Insurance Premium Tax Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to the health insurance premium tax credit enacted by the 
Patient Protection and Affordable Care Act and the Health Care and 
Education Reconciliation Act of 2010, as amended by the Medicare and 
Medicaid Extenders Act of 2010, the Comprehensive 1099 Taxpayer 
Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, 
and the Department of Defense and Full-Year Continuing Appropriations 
Act of 2011 and the 3% Withholding Repeal and Job Creation Act. These 
regulations affect individuals who enroll in qualified health plans 
through Affordable Insurance Exchanges (Exchanges) and claim the 
premium tax credit, and Exchanges that make qualified health plans 
available to individuals. The text of the temporary regulations in this 
document also serves as the text of proposed regulations set forth in a 
notice of proposed rulemaking (REG-104579-13) on this subject in the 
Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on July 28, 
2014.
    Applicability Date: For applicability dates, see Sec. Sec.  1.36B-
2T(d), 1.36B-3T(m), 1.36B-4T(c), and 1.162(l)-1T(c).

FOR FURTHER INFORMATION CONTACT: Arvind Ravichandran or Shareen Pflanz, 
(202) 317-4718 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains final and temporary regulations that amend 
the Income Tax Regulations (26 CFR part 1) under section 36B relating 
to the premium tax credit and under section 162(l) relating to the 
deduction for health insurance costs for self-employed individuals. 
Section 36B was enacted by the Patient Protection and Affordable Care 
Act, Public Law 111-148 (124 Stat. 119 (2010)), and the Health Care and 
Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 
1029 (2010)) (collectively, the Affordable Care Act). Section 36B 
provides a refundable premium tax credit to help individuals and 
families afford health insurance purchased through an Exchange.
    To be eligible for a premium tax credit under section 36B, an 
individual must be an applicable taxpayer. Section 36B(c)(1) provides 
that an applicable taxpayer is a taxpayer (1) with household income for 
the taxable year between 100 percent and 400 percent of the federal 
poverty line for the taxpayer's family size, (2) who may not be claimed 
as a dependent by another taxpayer, and (3) who files a joint return if 
married (within the meaning of section 7703).
    Section 7703(b) allows certain married individuals to be considered 
not married for purposes of the Internal Revenue Code. Under section 
7703(b), a married taxpayer who lives apart from the taxpayer's spouse 
for the last six months of the taxable year is considered unmarried if 
he or she files a separate return, maintains as the taxpayer's home a 
household that is also the principal place of abode of a dependent 
child for more than half the year, and furnishes over half the cost of 
the household during the taxable year.
    Section 36B(b)(2) provides that a taxpayer's premium tax credit is 
the lesser of the premiums for the plan or plans in which the taxpayer 
and the taxpayer's family enroll or the excess of the premiums for the 
second lowest cost silver plan covering the taxpayer's family (the 
benchmark plan) over the taxpayer's contribution amount. A taxpayer's 
contribution amount is the product of the taxpayer's household income 
and an applicable percentage that increases as the taxpayer's household 
income increases.
    Under section 1412 of the Affordable Care Act, eligible taxpayers 
may receive advance payments of the premium tax credit (advance credit 
payments). Section 36B(f) provides that taxpayers must reconcile any 
differences between the taxpayer's advance credit payments for a 
taxable year and the taxpayer's premium tax credit for the year. If the 
taxpayer's advance credit payments exceed the allowed premium tax 
credit, the taxpayer owes the excess as a tax liability, subject to a 
repayment limitation in section 36B(f)(2)(B).
    Under section 162(l), a taxpayer who is an employee within the 
meaning of section 401(c)(1)--generally, a self-employed individual--is 
allowed a deduction for all or a portion of the taxpayer's premiums 
paid during the taxable year for health insurance for the taxpayer, the 
taxpayer's spouse, the taxpayer's dependents, and any child of the 
taxpayer under the age of 27. The deduction allowed under section 
162(l) is limited to the taxpayer's earned income from the trade or 
business with respect to which the health insurance plan is 
established. In addition, section 280C(g) provides that no deduction is 
allowed under section 162(l) for the portion of premiums for a 
qualified health plan equal to the amount of the premium tax credit 
determined under section 36B(a) with respect to those premiums.

[[Page 43623]]

Explanation of Provisions

1. Circumstances in Which a Married Taxpayer May Claim a Premium Tax 
Credit on a Separate Return

    Final regulations under section 36B (TD 9590) were published on May 
23, 2012 (77 FR 30377). The final regulations provide that married 
taxpayers must file a joint return to claim the premium tax credit. 
However, the preamble to those regulations provided that Treasury and 
the IRS would propose additional regulations addressing domestic abuse, 
abandonment, or similar circumstances that create obstacles to filing a 
joint return. The preamble also requested comments on how to structure 
a rule to address these situations.
    Several comments were received urging that such a rule be provided. 
Commenters suggested that the rule draw on the existing regime for 
innocent spouse relief. Commenters also suggested that relief should be 
allowed for up to three years.
    Notice 2014-23, 2014-16 IRB. 942 (March 26, 2014), allows married 
victims of domestic abuse to claim a premium tax credit without filing 
a joint return in 2014. Under Notice 2014-23, for calendar year 2014, a 
married taxpayer will satisfy the joint filing requirement of section 
36B(c)(1)(C) if the taxpayer files a 2014 tax return using a filing 
status of married filing separately and the taxpayer (i) is living 
apart from the individual's spouse at the time the taxpayer files his 
or her tax return, (ii) is unable to file a joint return because the 
taxpayer is a victim of domestic abuse, and (iii) indicates on his or 
her 2014 income tax return in accordance with the relevant instructions 
that the taxpayer meets the criteria under (i) and (ii). Notice 2014-23 
also provides that the IRS and Treasury intend to propose regulations 
incorporating this rule.
    Accordingly, the temporary regulations incorporate the rule in 
Notice 2014-23 for 2014 and subsequent taxable years to provide relief 
from the joint filing requirement for victims of domestic abuse. The 
temporary regulations also provide relief to victims of spousal 
abandonment. Consistent with the comments received, taxpayers may not 
qualify for relief from the joint filing requirement for a period that 
exceeds three consecutive years.
    The temporary regulations define domestic abuse using a definition 
that is closely based on the definition of spousal abuse in Rev. Proc. 
2013-34, 2013-2 CB 397, for innocent spouse relief. In particular, 
domestic abuse includes physical, psychological, sexual, or emotional 
abuse, including efforts to control, isolate, humiliate, and 
intimidate, or to undermine the victim's ability to reason 
independently and that all facts and circumstances are considered in 
determining whether an individual is abused. A taxpayer qualifies as a 
victim of spousal abandonment for a taxable year if the taxpayer is 
abandoned by his or her spouse and, taking into account all facts and 
circumstances, the taxpayer is unable to locate his or her spouse after 
reasonable diligence. It is expected that the instructions for the tax 
form taxpayers will use to compute the premium tax credit will provide 
further guidance on claiming this relief, including that a taxpayer 
must certify that the taxpayer meets the criteria for the relief.
    On March 31, 2014, the Department of Health and Human Services 
(HHS) issued guidance on the application of Notice 2014-23 to advance 
credit payments and cost-sharing reductions. In accordance with the 
temporary regulations included here, it is anticipated HHS will extend 
its guidance beyond 2014 and to include victims of spousal abandonment.
    Comments are requested on the appropriateness of the relief 
provided in the temporary regulations, and the appropriateness of the 
scope of relief, including the circumstances that would make a taxpayer 
eligible for relief.

2. Indexing

    To compute the premium tax credit, a taxpayer determines his or her 
contribution amount by multiplying an applicable percentage by the 
taxpayer's household income. The taxpayer uses the percentage table in 
section 36B(b)(3)(A)(i) to compute his or her applicable percentage. 
Section 36B(b)(3)(A)(ii) provides that, beginning in 2015, the 
percentages in the table are adjusted to reflect the excess of the rate 
of premium growth over the rate of income growth for the preceding 
calendar year. Similarly, section 36B(c)(2)(C)(iv) provides that the 
affordability percentage provided in section 36B(c)(2)(C)(i)(II) is 
updated in the same manner for plan years beginning in calendar years 
after 2014. The affordability percentage is used to determine whether 
an employer's offer of coverage to an employee is affordable to the 
employee. Under section 36B(c)(2)(C)(i), a taxpayer who is not offered 
affordable employer coverage may be eligible for a premium tax credit.
    Section 36B(b)(3)(A)(ii) does not specify what measures should be 
used for premium growth and income growth. The temporary regulations 
provide that premium growth and income growth will be determined in 
accordance with further published guidance, see Sec.  601.601(d)(2) of 
this chapter. Rev. Proc. 2014-37, which is being released 
simultaneously with these temporary regulations, provides further 
details on the measures to be used for premium growth and income 
growth. In particular, consistent with the factors used by HHS to 
define premium growth in indexing the required contribution percentage 
in section 5000A, Rev. Proc. 2014-37 provides that premium growth for 
the preceding calendar year is the projected per enrollee spending for 
employer-sponsored private health insurance for the preceding calendar 
year, divided by the projected per enrollee spending for employer-
sponsored private health insurance for the calendar year two years 
prior. Income growth for the preceding calendar year will be the 
projected GDP per capita for the preceding calendar year divided by the 
projected GDP per capita for the calendar year two years prior. 
Projected per enrollee spending for employer-sponsored private health 
insurance and projected GDP per capita are published by the Office of 
the Actuary at the Centers for Medicare and Medicaid Services.
    Section 36B(b)(3)(A)(ii) also does not make clear what it means to 
adjust the applicable percentages to ``reflect the excess'' of one rate 
``over'' the other. Rates of growth are commonly compared by taking 
their ratio. In addition, the applicable percentages in section 
36B(b)(3)(A)(i) and the affordability percentage in section 
36B(c)(2)(C)(i)(II) represent shares of income that a taxpayer is 
expected to spend on health care premiums. The indexing of these 
measures in section 36B(b)(3)(A)(ii) appears designed to adjust these 
fractions to reflect changes in the observed share of overall income 
that is spent on health care premiums. Preserving this relationship 
requires that the applicable percentages be adjusted based on the ratio 
of the rate of premium growth to the rate of income growth. 
Accordingly, the temporary regulations provide that, for taxable years 
beginning after December 31, 2014, the applicable percentages in the 
table will be adjusted by the ratio of premium growth to income growth 
for the preceding calendar year.
    In addition, the temporary regulations provide that adjustments may 
be made to reflect updates to the data used to compute this ratio for 
the 2014 calendar year or to reflect updates to data sources used to 
compute the ratio of premium growth to income growth. Such an

[[Page 43624]]

adjustment may be necessary to avoid error propagation when making 
updates. In particular, in computing this ratio for a given calendar 
year, the computations rely on projected data for the prior year and 
the 2013 calendar year. To the extent that the final data for the prior 
calendar year prove different from the projected data, the projected 
data used in later years will automatically adjust for those 
differences. However, if the final data for the 2013 calendar year 
proves different from the projected data, projected data in later years 
will not adjust for these differences, so an additional adjustment will 
be needed. Similarly, if alternative data sources are used to compute 
the ratio in later years, an additional adjustment may be needed to 
avoid error that could result from transitioning from the prior data 
sources to the new ones. These adjustments will be made as part of the 
procedure by which the applicable percentages and affordability 
percentage are updated by the ratio of premium growth to income growth 
and will apply prospectively only. For example, if data for the 2013 
calendar year data is finalized in early 2016, the additional 
adjustment will be made in determining the applicable percentages and 
affordability percentage in effect for the 2017 calendar year.
    With respect to the affordability percentage, the final regulations 
under section 36B inadvertently refer to taxable years rather than plan 
years beginning after 2014. Consistent with the language in section 
36B(c)(2)(C)(iv), the temporary regulations provide that, for plan 
years beginning in a calendar year after 2014, the affordability 
percentage will be adjusted by the same method used to adjust the 
applicable percentages.
    The indexing methodology provided for in the temporary regulations 
is based on the same data sources as the methodology adopted by HHS for 
adjusting the required contribution percentage in section 5000A, which 
is used to determine eligibility for an exemption from the shared 
responsibility payment, and it will result in adjustments to the 
applicable percentages and affordability percentage that are consistent 
with the adjustments made by HHS to the required contribution 
percentage in section 5000A. See 79 FR 30240 (May 27, 2014).
    Comments are requested on the methodology for indexing. In 
particular, comments are requested on whether this approach properly 
captures the rate of premium growth relative to the rate of income 
growth and whether alternative indices or data sources should be used.

3. Allocations for Reconciliation of Advance Credit Payments and the 
Premium Tax Credit

    The final regulations under section 36B provide that a taxpayer 
must reconcile all advance credit payments for coverage of any member 
of the taxpayer's family. A taxpayer's family includes the taxpayer, 
the taxpayer's spouse and the taxpayer's dependents. The final 
regulations, however, do not address how a taxpayer computes the 
premium tax credit and reconciles advance credit payments for coverage 
of a family member if the family member was enrolled in a qualified 
health plan by another taxpayer, especially in situations in which the 
family member is enrolled with others who are not in the taxpayer's 
family. For example, suppose Adult 1 enrolls herself and her three 
children in a qualified health plan and, based on a good faith 
assertion that she will claim the children as dependents, is approved 
for advance credit payments for coverage of the family. One of the 
children (Child), however, is not claimed by Adult 1 and instead is 
properly claimed by Adult 2 as a dependent for the taxable year. In 
this circumstance, the final regulations neither address how much of 
the premium for the plan purchased by Adult 1 each taxpayer should take 
into account in determining his or her premium tax credit, nor the 
amount of advance credit payments for Adult 1's plan that Adult 2 must 
reconcile for Child's coverage. In addition, the final regulations 
under section 36B require Adult 1 and Adult 2 to determine their 
adjusted monthly premium for the applicable benchmark plan (benchmark 
plan premium) in this circumstance using the rules that apply to 
taxpayers who do not have family members enrolled by another taxpayer.
    The temporary regulations provide rules to address how taxpayers 
determine their premium tax credit and reconcile advance credit 
payments in cases in which an individual is enrolled by one taxpayer 
but another taxpayer claims a personal exemption deduction for the 
individual. In particular, the temporary regulations provide that if a 
taxpayer (the enrolling taxpayer) enrolls an individual in a qualified 
health plan, but another taxpayer (the claiming taxpayer) claims a 
personal exemption deduction for the enrollee (the shifting enrollee), 
then for purposes of computing each taxpayer's premium tax credit and 
reconciling any advance credit payments, the premiums and any advance 
credit payments for the plan in which the shifting enrollee was 
enrolled are allocated between the enrolling taxpayer and the claiming 
taxpayer using an allocation percentage. In addition, the temporary 
regulations provide an alternate calculation that is used to determine 
each taxpayer's benchmark plan premium when advance credit payments are 
allocated, using the same allocation percentage.
    The enrolling taxpayer and claiming taxpayer may generally agree on 
any allocation percentage between zero and one hundred percent. For 
instance, Adult 1 and Adult 2 may determine that the premium 
attributable to Child is 20 percent of the total premium for Adult 1's 
family plan, and agree on an allocation percentage of 20 percent. If 
the claiming taxpayer and enrolling taxpayer do not agree on a 
percentage, the allocation percentage is equal to the number of 
shifting enrollees divided by the total number of individuals enrolled 
by the enrolling taxpayer in the same qualified health plan as the 
shifting enrollees. In the example above, if Adult 1 and Adult 2 did 
not agree on an allocation percentage, the allocation percentage would 
be 25 percent (one, the number of shifting enrollees, divided by four, 
the total number of individuals enrolled by Adult 1 in the same plan as 
the shifting enrollee).
    In computing the premium tax credit, the claiming taxpayer is 
allocated a portion of the premiums for the plan in which the enrollee 
was enrolled equal to the premiums times the allocation percentage. The 
enrolling taxpayer is allocated the remainder of the premiums. 
Similarly, in reconciling advance credit payments, the claiming 
taxpayer is allocated a portion of the advance credit payments for the 
plan in which the shifting enrollee was enrolled equal to the advance 
credit payments times the allocation percentage. The enrolling taxpayer 
is allocated the remainder of these amounts. Advance credit payments 
are allocated to the claiming taxpayer only if advance credit payments 
are made for coverage of the shifting enrollee.
    Finally, if advance credit payments are allocated under the rules 
above, the taxpayers, in computing their premium tax credit, must use 
an alternative calculation to determine their benchmark plan premium. 
The benchmark plan premium is generally the premium an issuer would 
charge for the applicable benchmark plan to cover all members of the 
taxpayer's coverage family, adjusted only for the age of each member of 
the coverage family. Under the alternative calculation, each taxpayer 
will first determine the allocable portion of the enrolling taxpayer's 
benchmark plan premium (allocable portion). The allocable

[[Page 43625]]

portion is equal to the product of (1) the allocation percentage and 
(2) the benchmark plan premium for the enrolling taxpayer's coverage 
family had the enrolling taxpayer claimed a personal exemption 
deduction for the shifting enrollee or enrollees for the taxable year. 
If the enrolling taxpayer's coverage family is enrolled in more than 
one qualified health plan, the allocable portion is determined as if 
the enrolling taxpayer's coverage family includes only the family 
members who enrolled in the same plan as the shifting enrollee or 
enrollees. The benchmark plan premium for the claiming taxpayer is 
equal to this allocable portion plus the benchmark plan premium for the 
claiming taxpayer's coverage family excluding the shifting enrollee or 
enrollees. The enrolling taxpayer's benchmark plan premium is equal to 
the benchmark plan premium for the enrolling taxpayer's coverage family 
had the enrolling taxpayer claimed a personal exemption deduction for 
the shifting enrollee or enrollees, minus the allocable portion.

4. Reconciliation for Divorced and Separated Taxpayers

    The temporary regulations clarify how taxpayers who legally 
separate or divorce allocate the benchmark plan premium, the premium 
for the plan in which the taxpayers or their dependents enroll, and the 
advance credit payments to compute their respective premium tax credit 
and excess advance credit payments. The final section 36B regulations 
provide that if just one of the taxpayers is enrolled in the qualified 
health plan for the married months, all of the items are allocated to 
that taxpayer, even if the taxpayer's former spouse had one or more 
dependents also enrolled in the same plan. The temporary regulations 
expand the circumstances in which the items are allocated between the 
former spouses to include dependent situations and limit the instances 
in which all of the items are allocated to just one of the spouses.
    Under the temporary regulations, taxpayers who are married (within 
the meaning of section 7703) to each other during a taxable year but 
are not married to each other on the last day of the taxable year, and 
who are enrolled in the same qualified health plan, must allocate the 
benchmark plan premium, the premium for the plan in which the taxpayers 
and their dependents enroll, and the advance credit payments for the 
period the taxpayers are married during the taxable year. In addition, 
these items must be allocated for periods in which just one of the 
former spouses is enrolled if one or more dependents of the other 
former spouse is also enrolled in the plan. The taxpayers may allocate 
these items to each former spouse in any proportion but must allocate 
all items in the same proportion. If the taxpayers do not agree on an 
allocation that is reported to the IRS in accordance with the relevant 
forms and instructions, 50 percent of each item is allocated to each 
taxpayer. If a plan covers for a time period only one of the taxpayers 
and no dependents, only one of the taxpayers and one or more dependents 
of that same taxpayer, or only one or more dependents of just one of 
the taxpayers, then the benchmark plan premium, the premium for the 
plan in which the taxpayers or their dependents enroll, and the advance 
credit payments for that period are allocated entirely to that 
taxpayer.

5. Reconciliation for Married Taxpayers Who File Separately

    The temporary regulations also amend the reconciliation rules for 
taxpayers who are married and file separate returns. The final 
regulations under section 36B provide that a married taxpayer who 
receives advance credit payments and files an income tax return as 
married filing separately has received excess advance payments. Under 
the temporary regulations, a taxpayer who uses a filing status of 
married filing separately may be allowed a premium tax credit if the 
taxpayer is a victim of spousal abuse or abandonment. Consequently, in 
these limited circumstances, a married taxpayer who receives advance 
credit payments and uses a married filing separately filing status will 
not have excess advance payments by reason of his or her filing status. 
The temporary regulations also clarify the manner in which taxpayers 
reconcile advance credit payments in situations in which the taxpayers 
indicate that they are married when applying for advance credit 
payments, but one or both file their tax return using the head of 
household filing status. Taxpayers who qualify to use the head of 
household filing status may be eligible for a premium tax credit. In 
particular, the temporary regulations provide that, in such cases, 50 
percent of the advance credit payments for a period of coverage in a 
qualified health plan are allocated to each taxpayer. However, all of 
the advance credit payments are allocated to only one of the taxpayers 
for a period in which a qualified health plan covers only that 
taxpayer, only that taxpayer and one or more dependents of that 
taxpayer, or only one or more dependents of that taxpayer. Premiums for 
the plan in which the taxpayers or their dependents are enrolled are 
allocated in the same manner whether or not the taxpayers receive 
advance credit payments. These rules result in the advance credit 
payments and premiums being allocated in the same proportion to the two 
taxpayers.

6. Deduction for Health Insurance Costs of Self-Employed Individuals

    Under section 162(l), a taxpayer who is an employee within the 
meaning of section 401(c)(1) (generally, a self-employed individual) is 
allowed a deduction for all or a portion of the taxpayer's premiums 
paid during the taxable year for health insurance for the taxpayer, the 
taxpayer's spouse, the taxpayer's dependents, and any child of the 
taxpayer under the age of 27. The section 162(l) deduction is allowed 
in computing adjusted gross income. The deduction allowed under section 
162(l) may not exceed the taxpayer's earned income from the trade or 
business with respect to which the health insurance plan is 
established. In addition, section 280C(g) provides that no deduction is 
allowed under section 162(l) for the portion of premiums for a 
qualified health plan equal to the amount of the premium tax credit 
determined under section 36B(a) with respect to those premiums.
    The temporary regulations provide rules for the interaction between 
the section 162(l) deduction and both the premium tax credit and the 
limitation on additional tax under section 36B(f)(2)(B). The temporary 
regulations provide that a taxpayer is allowed a deduction under 
section 162(l) for specified premiums not to exceed the lesser of (1) 
the specified premiums less the premium tax credit attributable to the 
specified premiums; and (2) the sum of the specified premiums not paid 
through advance credit payments and the additional tax imposed (if any) 
under section 36B(f)(2)(A) with respect to the specified premiums after 
applying the limitation in section 36B(f)(2)(B). Specified premiums 
means premiums for a specified qualified health plan or plans for which 
the taxpayer may otherwise claim a deduction under section 162(l). A 
specified qualified health plan is a qualified health plan, as defined 
in Sec.  1.36B-1(c), covering the taxpayer, the taxpayer's spouse, or a 
dependent of the taxpayer (enrolled family member) for a month that is 
a coverage month within the meaning of Sec.  1.36B-3(c) for the 
enrolled family member. If a specified qualified health plan covers one 
or more individuals other than enrolled family members, the specified 
premiums include only the portion of the premiums for the

[[Page 43626]]

specified qualified health plan that is allocable to the enrolled 
family members under rules similar to Sec.  1.36B-3(h), which provides 
rules for determining the amount under Sec.  1.36B-3(d)(1) when two 
families are enrolled in the same qualified health plan.
    Although a taxpayer's section 162(l) deduction is limited under 
section 280C(g) only to the extent of the taxpayer's premium tax 
credit, some taxpayers with advance payments in excess of their premium 
tax credit will not have to repay the entire excess because of the 
limitation on additional tax in section 36B(f)(2)(B). Because the 
taxpayer does not bear the cost of any portion of the premium that is 
paid through advance credit payments and that is not subject to 
repayment due to the limitations, any such amount is treated as an 
amount of premium tax credit for purposes of section 280C(g).
    As a computational matter, the premium tax credit and the 
limitation on additional tax bear a circular relationship to the 
section 162(l) deduction that may create challenges for taxpayers. 
Specifically, the amount of the section 162(l) deduction affects a 
taxpayer's adjusted gross income, which affects both the premium tax 
credit and the limitation on additional tax. Conversely, both the 
premium tax credit and the limitation on additional tax affect the 
amount a taxpayer spends on health insurance premiums, which in turn 
affects the taxpayer's section 162(l) deduction.
    A taxpayer may resolve the circularity between the section 162(l) 
deduction and the premium tax credit by taking any position that 
satisfies the requirements of section 36B, section 162(l) and other 
applicable tax law and the regulations issued under those sections, 
including the temporary regulations in this rulemaking.
    To address the circularity between the section 162(l) deduction and 
the limitation on additional tax under section 36B(f)(2)(B) (limitation 
amount), the temporary regulations provide rules for determining which 
limitation amount, if any, a taxpayer may use. Taxpayers make this 
determination before calculating their section 162(l) deduction and 
premium tax credit. To determine the limitation amount, a taxpayer 
tests his or her eligibility for each of the limitation amounts that 
may apply, starting with the lowest, until the taxpayer either 
determines that he or she qualifies for one of the limitation amounts 
or exhausts them without qualifying for one. For each limitation 
amount, the taxpayer qualifies to use that limitation amount if the 
taxpayer's household income as a percentage of the Federal poverty 
line, determined by using a section 162(l) deduction equal to the sum 
of (1) specified premiums, as defined above, not paid through advance 
credit payments, (2) the limitation amount, and (3) premiums other than 
specified premiums for which the taxpayer may claim a section 162(l) 
deduction, is equal to or less than the maximum household income as a 
percentage of the Federal poverty line for which that limitation amount 
is available. For example, if a taxpayer's 2014 household income, using 
a section 162(l) deduction equal to the sum of the specified premiums 
not paid through advance credit payments and the $600 limitation 
amount, is less than 200 percent of the Federal poverty line, the 
taxpayer uses the $600 limitation amount in determining additional tax 
under section 36B(f)(2)(B). If a taxpayer is unable to qualify for any 
limitation amount under this rule, the limitation on additional tax 
under section 36B(f)(2)(B) does not apply to the taxpayer.
    A taxpayer who deducts specified premiums under section 162(l) must 
use the limitation amount determined under this rule notwithstanding 
that household income as a percentage of the Federal poverty line 
would, but for this rule, result in a different limitation amount. 
After a taxpayer determines his or her limitation amount, if any, under 
this rule, the taxpayer then determines the section 162(l) deduction 
and premium tax credit under the other rules described above, except 
using the limitation amount determined under these rules when 
necessary. These rules apply only for purposes of determining the 
limitation amount; they do not affect eligibility for the premium tax 
credit. Thus, it is possible that a taxpayer with household income 
under 400 percent of the Federal poverty line for the taxpayer's family 
size may properly claim a premium tax credit but not qualify for a 
limitation on additional tax.
    The temporary regulations further provide that Treasury and IRS may 
issue additional published guidance to address potential complexities 
arising from the interaction of the section 36B premium tax credit and 
the section 162(l) deduction. To provide additional assistance to 
taxpayers with addressing the circularity between the section 162(l) 
deduction and the premium tax credit, Rev. Proc. 2014-41 provides 
calculation methods that a taxpayer may use to determine amounts of the 
section 162(l) deduction and the premium tax credit. The IRS and 
Treasury request comments on other methods for simplifying these 
calculations.

Effective/Applicability Date

    For applicability dates, see Sec. Sec.  1.36B-2T(d), 1.36B-3T(m), 
1.36B-4T(c), and 1.162(l)-1T(c). The applicability of these regulations 
expires on or before July 24, 2017.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations. For the applicability of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) please refer to the cross-
reference notice of proposed rulemaking published elsewhere in this 
issue of the Federal Register. Pursuant to section 7805(f), these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Drafting Information

    The principal authors of these regulations are Arvind Ravichandran, 
Shareen Pflanz and Steve Toomey of the Office of the Associate Chief 
Counsel (Income Tax & Accounting). However, other personnel from the 
IRS and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.36B-2 is amended by:
0
1. Revising paragraphs (b)(2) and (c)(3)(v)(C).
0
2. Adding paragraph (d).
    The revisions and additions read as follows:


Sec.  1.36B-2  Eligibility for premium tax credit.

* * * * *
    (b) * * *
    (2) [Reserved]. For further guidance, see Sec.  1.36B-2T(b)(2).
* * * * *

[[Page 43627]]

    (c) * * *
    (3) * * *
    (v) * * *
    (C) [Reserved]. For further guidance, see Sec.  1.36B-
2T(c)(3)(v)(C).
* * * * *
    (d) [Reserved]. For further guidance, see Sec.  1.36B-2T(d).

0
Par. 3. Section 1.36B-2T is added to read as follows:


Sec.  1.36B-2T  Eligibility for premium tax credit (temporary).

    (a) through (b)(1) [Reserved]. For further guidance, see Sec.  
1.36B-2(a) through (b)(1).
    (2) Married taxpayers must file joint return--(i) In general. 
Except as provided in paragraph (b)(2)(ii) of this section, a taxpayer 
who is married (within the meaning of section 7703) at the close of the 
taxable year is an applicable taxpayer only if the taxpayer and the 
taxpayer's spouse file a joint return for the taxable year.
    (ii) Victims of domestic abuse and abandonment. Except as provided 
in paragraph (b)(2)(v) of this section, a married taxpayer satisfies 
the joint filing requirement of paragraph (b)(2)(i) of this section if 
the taxpayer files a tax return using a filing status of married filing 
separately and the taxpayer--
    (A) Is living apart from the taxpayer's spouse at the time the 
taxpayer files the tax return;
    (B) Is unable to file a joint return because the taxpayer is a 
victim of domestic abuse, as described in paragraph (b)(2)(iii) of this 
section, or spousal abandonment, as described in paragraph (b)(2)(iv) 
of this section; and
    (C) Certifies on the return, in accordance with the relevant 
instructions, that the taxpayer meets the criteria of this paragraph 
(b)(2)(ii).
    (iii) Domestic abuse. For purposes of paragraph (b)(2)(ii) of this 
section, domestic abuse includes physical, psychological, sexual, or 
emotional abuse, including efforts to control, isolate, humiliate, and 
intimidate, or to undermine the victim's ability to reason 
independently. All the facts and circumstances are considered in 
determining whether an individual is abused, including the effects of 
alcohol or drug abuse by the victim's spouse. Depending on the facts 
and circumstances, abuse of the victim's child or another family member 
living in the household may constitute abuse of the victim.
    (iv) Abandonment. For purposes of paragraph (b)(2)(ii) of this 
section, a taxpayer is a victim of spousal abandonment for a taxable 
year if, taking into account all facts and circumstances, the taxpayer 
is unable to locate his or her spouse after reasonable diligence.
    (v) Three-year rule. Paragraph (b)(2)(ii) of this section does not 
apply if the taxpayer met the requirements of paragraph (b)(2)(ii) of 
this section for each of the three preceding taxable years.
    (b)(3) through (c)(3)(v)(B) [Reserved]. For further guidance, see 
Sec.  1.36B-2(b)(3) through (c)(3)(v)(B).
    (C) Required contribution percentage. The required contribution 
percentage is 9.5 percent. For plan years beginning in a calendar year 
after 2014, the percentage will be adjusted by the ratio of premium 
growth to income growth for the preceding calendar year and may be 
further adjusted to reflect changes to the data used to compute the 
ratio of premium growth to income growth for the 2014 calendar year or 
the data sources used to compute the ratio of premium growth to income 
growth. Premium growth and income growth will be determined under 
published guidance, see Sec.  601.601(d)(2) of this chapter. In 
addition, the percentage may be adjusted for plan years beginning in a 
calendar year after 2018 to reflect rates of premium growth relative to 
growth in the consumer price index.
    (c)(3)(v)(D) through (c)(4) [Reserved]. For further guidance, see 
Sec.  1.36B-2(c)(3)(v)(D) through (c)(4).
    (d) Effective/applicability date. Paragraphs (b)(2) and 
(c)(3)(v)(C) of this section apply to taxable years beginning after 
December 31, 2013.
    (e) Expiration date. Paragraphs (b)(2) and (c)(3)(v)(C) of this 
section expire on July 24, 2017.

0
Par. 4. Section 1.36B-3 is amended by:
0
1. Revising paragraph (g)(1).
0
2. Adding paragraph (m).
    The revisions and additions read as follows:


Sec.  1.36B-3  Computing the premium assistance credit amount.

* * * * *
    (g) * * *
    (1) [Reserved]. For further guidance, see Sec.  1.36B-3T(g)(1).
* * * * *
    (m) [Reserved]. For further guidance, see Sec.  1.36B-3T(m).

0
Par. 5. Section 1.36B-3T is added to read as follows:


Sec.  1.36B-3T  Computing the premium assistance credit amount 
(temporary).

    (a) through (f) [Reserved]. For further guidance, see Sec.  1.36B-
3(a) through (f).
    (g) Applicable percentage--(1) In general. The applicable 
percentage multiplied by a taxpayer's household income determines the 
taxpayer's annual required share of premiums for the benchmark plan. 
The required share is divided by 12 and this monthly amount is 
subtracted from the adjusted monthly premium for the applicable 
benchmark plan when computing the premium assistance amount. The 
applicable percentage is computed by first determining the percentage 
that the taxpayer's household income bears to the Federal poverty line 
for the taxpayer's family size. The resulting Federal poverty line 
percentage is then compared to the income categories described in the 
table in paragraph (g)(2) of this section (or successor tables). An 
applicable percentage within an income category increases on a sliding 
scale in a linear manner and is rounded to the nearest one-hundredth of 
one percent. For taxable years beginning after December 31, 2014, the 
applicable percentages in the table will be adjusted by the ratio of 
premium growth to income growth for the preceding calendar year and may 
be further adjusted to reflect changes to the data used to compute the 
ratio of premium growth to income growth for the 2014 calendar year or 
the data sources used to compute the ratio of premium growth to income 
growth. Premium growth and income growth will be determined in 
accordance with published guidance, see Sec.  601.601(d)(2) of this 
chapter. In addition, the applicable percentages in the table may be 
adjusted for taxable years beginning after December 31, 2018, to 
reflect rates of premium growth relative to growth in the consumer 
price index.
    (g)(2) through (l) [Reserved]. For further guidance, see Sec.  
1.36B-3(g)(2) through (l).
    (m) Effective/applicability date. Paragraph (g)(1) of this section 
applies to taxable years beginning after December 31, 2013.
    (n) Expiration date. Paragraph (g)(1) of this section expires on 
July 24, 2017.

0
Par. 6. Section 1.36B-4 is amended by:
0
1. Revising paragraph (a)(1)(ii).
0
2. Adding paragraph (a)(3)(iii).
0
3. In paragraph (a)(4), revising Example 4 and adding Examples 10, 11, 
12, 13, and 14.
0
4. Revising paragraphs (b)(3) and (b)(4).
0
5. Removing paragraph (b)(5).
0
6. Redesignating paragraph (b)(6) as paragraph (b)(5), and revising 
Example 9, and adding Example 10 to newly redesignated paragraph 
(b)(5).
0
7. Adding paragraph (c).
    The revisions and additions read as follows:

[[Page 43628]]

Sec.  1.36B-4  Reconciling the premium tax credit with advance credit 
payments.

    (a) * * * (1) * * *
    (ii) [Reserved]. For further guidance, see Sec.  1.36B-
4T(a)(1)(ii).
* * * * *
    (3) * * *
    (iii) [Reserved]. For further guidance, see Sec.  1.36B-
4T(a)(3)(iii).
    (4) * * *
    Example 4. [Reserved]. For further guidance, see Sec.  1.36B-
4T(a)(4), Example 4.
* * * * *
    Example 10. [Reserved]. For further guidance, see Sec.  1.36B-
4T(a)(4), Example 10.
    Example 11. [Reserved]. For further guidance, see Sec.  1.36B-
4T(a)(4), Example 11.
    Example 12. [Reserved]. For further guidance, see Sec.  1.36B-
4T(a)(4), Example 12.
    Example 13. [Reserved]. For further guidance, see Sec.  1.36B-
4T(a)(4), Example 13.
    Example 14. [Reserved]. For further guidance, see Sec.  1.36B-
4T(a)(4), Example 14.
    (b) * * *
    (3) [Reserved]. For further guidance, see Sec.  1.36B-4T(b)(3).
    (4) [Reserved]. For further guidance, see Sec.  1.36B-4T(b)(4).
    (5) * * *
    Example 9. [Reserved]. For further guidance, see Sec.  1.36B-
4T(b)(5), Example 9.
    Example 10. [Reserved]. For further guidance, see Sec.  1.36B-
4T(b)(5), Example 10.
* * * * *
    (c) [Reserved]. For further guidance, see Sec.  1.36B-4T(c).
0
Par. 7. Section 1.36B-4T is added to read as follows:


Sec.  1.36B-4T  Reconciling the premium tax credit with advance credit 
payments (temporary).

    (a)(1)(i) [Reserved]. For further guidance, see Sec.  1.36B-
4(a)(1)(i).
    (ii) Allocation rules and responsibility for advance credit 
payments--(A) In general. A taxpayer must reconcile all advance credit 
payments for coverage of any member of the taxpayer's family.
    (B) Individuals enrolled by a taxpayer and claimed as a personal 
exemption deduction by another taxpayer--(1) In general. If a taxpayer 
(the enrolling taxpayer) enrolls an individual in a qualified health 
plan and another taxpayer (the claiming taxpayer) claims a personal 
exemption deduction for the individual (the shifting enrollee), then 
for purposes of computing each taxpayer's premium tax credit and 
reconciling any advance credit payments, the premiums and advance 
credit payments for the plan in which the shifting enrollee was 
enrolled are allocated under this paragraph (a)(1)(ii)(B) according to 
the allocation percentage described in paragraph (a)(1)(ii)(B)(2) of 
this section. If advance credit payments are allocated under paragraph 
(a)(1)(ii)(B)(4) of this section, the claiming taxpayer and enrolling 
taxpayer must use this same allocation percentage to calculate their 
Sec.  1.36B-3(d)(2) adjusted monthly premiums for the applicable 
benchmark plan (benchmark plan premiums). This paragraph (a)(1)(ii)(B) 
does not apply to amounts allocated under Sec.  1.36B-3(h) (qualified 
health plan covering more than one family) or if the shifting enrollee 
or enrollees are the only individuals enrolled in the qualified health 
plan. For purposes of this paragraph (a)(1)(ii)(B)(1), a taxpayer who 
is expected at enrollment in a qualified health plan to be the taxpayer 
filing an income tax return for the year of coverage with respect to an 
individual enrolling in the plan has enrolled that individual.
    (2) Allocation percentage. The enrolling taxpayer and claiming 
taxpayer may agree on any allocation percentage between zero and one 
hundred percent. If the enrolling taxpayer and claiming taxpayer do not 
agree on an allocation percentage, the percentage is equal to the 
number of shifting enrollees claimed as a personal exemption deduction 
by the claiming taxpayer divided by the number of individuals enrolled 
by the enrolling taxpayer in the same qualified health plan as the 
shifting enrollee.
    (3) Allocating premiums. In computing the premium tax credit, the 
claiming taxpayer is allocated a portion of the premiums for the plan 
in which the shifting enrollee was enrolled equal to the premiums for 
the plan times the allocation percentage. The enrolling taxpayer is 
allocated the remainder of the premiums not allocated to one or more 
claiming taxpayers.
    (4) Allocating advance credit payments. In reconciling any advance 
credit payments, the claiming taxpayer is allocated a portion of the 
advance credit payments for the plan in which the shifting enrollee was 
enrolled equal to the enrolling taxpayer's advance credit payments for 
the plan times the allocation percentage. The enrolling taxpayer is 
allocated the remainder of the advance credit payments not allocated to 
one or more claiming taxpayers. This paragraph (a)(1)(ii)(B)(4) only 
applies in situations in which advance credit payments are made for 
coverage of a shifting enrollee.
    (5) Premiums for the applicable benchmark plan. If paragraph 
(a)(1)(ii)(B)(4) of this section applies, the claiming taxpayer's 
benchmark plan premium is the sum of the benchmark plan premium for the 
claiming taxpayer's coverage family, excluding the shifting enrollee or 
enrollees, and the allocable portion. The allocable portion for 
purposes of this paragraph (a)(1)(ii)(B)(5) is the product of the 
benchmark plan premium for the enrolling taxpayer's coverage family if 
the shifting enrollee was a member of the enrolling taxpayer's coverage 
family and the allocation percentage. If the enrolling taxpayer's 
coverage family is enrolled in more than one qualified health plan, the 
allocable portion is determined as if the enrolling taxpayer's coverage 
family includes only the coverage family members who enrolled in the 
same plan as the shifting enrollee or enrollees. The enrolling 
taxpayer's benchmark plan premium is the benchmark plan premium for the 
enrolling taxpayer's coverage family had the shifting enrollee or 
enrollees remained a part of the enrolling taxpayer's coverage family, 
minus the allocable portion.
    (C) Responsibility for advance credit payments for an individual 
for whom no personal exemption deduction is claimed. If advance credit 
payments are made for coverage of an individual for whom no taxpayer 
claims a personal exemption deduction, the taxpayer who attested to the 
Exchange to the intention to claim a personal exemption deduction for 
the individual as part of the advance credit payment eligibility 
determination for coverage of the individual must reconcile the advance 
credit payments.
    (a)(1)(iii) through (a)(3)(ii) [Reserved]. For further guidance, 
see Sec.  1.36B-4(a)(1)(iii) through (a)(3)(ii).
    (iii) Limitation on additional tax for taxpayers who claim a 
section 162(l) deduction for a qualified health plan--(A) In general. A 
taxpayer who receives advance credit payments and deducts premiums for 
a qualified health plan under section 162(l) must use paragraphs 
(a)(3)(iii)(B) and (C) of this section to determine the limitation on 
additional tax in this paragraph (a)(3) (limitation amount). Taxpayers 
must make this determination before calculating their section 162(l) 
deduction and premium tax credit. For additional rules for taxpayers 
who may claim a deduction under section 162(l) for a qualified health 
plan for which advance credit payments are made, see Sec.  1.162(l)-1T.

[[Page 43629]]

    (B) Determining the limitation amount. A taxpayer described in 
paragraph (a)(3)(iii)(A) of this section must use the limitation amount 
for which the taxpayer qualifies under the requirements of paragraph 
(a)(3)(iii)(C) of this section. The limitation amount determined under 
this paragraph (a)(3)(iii) replaces the limitation amount that would 
otherwise be determined under the additional tax limitation table in 
paragraph (a)(3)(ii) of this section. In applying paragraph 
(a)(3)(iii)(C) of this section, a taxpayer must first determine whether 
he or she qualifies for the limitation amount applicable to taxpayers 
with household income of less than 200 percent of the Federal poverty 
line for the taxpayer's family size. If the taxpayer is unable to meet 
the requirements of paragraph (a)(3)(iii)(C) of this section for that 
limitation amount, the taxpayer must next determine whether he or she 
qualifies for the limitation applicable to taxpayers with household 
income of less than 300 percent of the Federal poverty line for the 
taxpayer's family size. If the taxpayer is unable to meet the 
requirements of paragraph (a)(3)(iii)(C) of this section for taxpayers 
with household income of less than 300 percent of the Federal poverty 
line for the taxpayer's family size, the taxpayer must next determine 
whether he or she qualifies for the limitation applicable to taxpayers 
with household income of less than 400 percent of the Federal poverty 
line for the taxpayer's family size. If the taxpayer is unable to meet 
the requirements of paragraph (a)(3)(iii)(C) of this section for any 
limitation amount, the limitation on additional tax under section 
36B(f)(2)(B) does not apply to the taxpayer.
    (C) Requirements. A taxpayer meets the requirements of this 
paragraph (a)(3)(iii)(C) for a limitation amount if the taxpayer's 
household income as a percentage of the Federal poverty line is less 
than or equal to the maximum household income as a percentage of the 
Federal poverty line for which that limitation is available. Household 
income for this purpose is determined by using a section 162(l) 
deduction equal to the sum of the specified premiums for the plan not 
paid through advance credit payments and the limitation amount in 
addition to any deduction allowable under section 162(l) for premiums 
other than specified premiums. For purposes of this paragraph 
(a)(3)(iii)(C), specified premiums not paid through advance credit 
payments means specified premiums, as defined in Sec.  1.162(l)-
1T(a)(2), minus advance credit payments made with respect to the 
specified premiums.
    (D) Examples. For examples illustrating the rules of this paragraph 
(a)(3)(iii), see Examples 13 and 14 of paragraph (a)(4) of this 
section.
    (a)(4), Example 1, through Example 3 [Reserved]. For further 
guidance, see Sec.  1.36B-4(a)(4), Example 1 through Example 3.

    Example 4. Family size decreases. (i) Taxpayers B and C are 
married and have two children, K and L (ages 17 and 20), whom they 
claim as dependents in 2013. The Exchange for their rating area 
projects their 2014 household income to be $63,388 (275 percent of 
the Federal poverty line for a family of four, applicable percentage 
8.78). B and C enroll in a qualified health plan for 2014 that 
covers the four family members. The annual premium for the 
applicable benchmark plan is $14,100. B's and C's advance credit 
payments for 2014 are $8,535, computed as follows: benchmark plan 
premium of $14,100 less contribution amount of $5,565 (projected 
household income of $63,388 x .0878) = $8,535.
    (ii) In 2014, B and C do not claim L as their dependent (and no 
taxpayer claims a personal exemption deduction for L). Consequently, 
B's and C's family size for 2014 is three, their household income of 
$63,388 is 332 percent of the Federal poverty line for a family of 
three (applicable percentage 9.5), and the annual premium for their 
applicable benchmark plan is $12,000. Their premium tax credit for 
2014 is $5,978 ($12,000 benchmark plan premium less $6,022 
contribution amount (household income of $63,388 x .095)). Because 
B's and C's advance credit payments for 2014 are $8,535 and their 
2014 credit is $5,978, B and C have excess advance payments of 
$2,557. B's and C's additional tax liability for 2014 under 
paragraph (a)(1) of this section, however, is limited to $2,500 
under paragraph (a)(3) of this section.

    Example 5 through Example 9 [Reserved]. For further guidance, see 
1.36B-4(a)(4), Example 5 through Example 9.

    Example 10. Allocation percentage, agreement on allocation. (i) 
Taxpayers G and H are divorced and have two children, J and K. G 
enrolls herself and J and K in a qualified health plan for 2014. The 
premium for the plan in which G enrolls is $13,000. The Exchange in 
G's rating area approves advance credit payments for G based on a 
family size of three, an annual benchmark plan premium of $12,000 
and projected 2014 household income of $58,590 (300 percent of the 
Federal poverty line for a family of three, applicable percentage 
9.5). G's advance credit payments for 2014 are $6,434 ($12,000 
benchmark plan premium less $5,566 contribution amount (household 
income of $58,590 x .095)). G's actual household income for 2014 is 
$58,900.
    (ii) K lives with H for more than half of 2014 and H claims K as 
a dependent for 2014. G and H agree to an allocation percentage, as 
described in paragraph (a)(1)(ii)(B)(2) of this section, of 20 
percent. Under the agreement, H is allocated 20 percent of the items 
to be allocated and G is allocated the remainder of those items.
    (iii) If H is eligible for a premium tax credit, H takes into 
account $2,600 of the premiums for the plan in which K was enrolled 
($13,000 x .20) and $2,400 of G's benchmark plan premium ($12,000 x 
.20). In addition, H is responsible for reconciling $1,287 ($6,434 x 
.20) of the advance credit payments for K's coverage.
    (iv) G's family size for 2014 includes only G and J and G's 
household income of $58,900 is 380 percent of the Federal poverty 
line for a family of two (applicable percentage 9.5). G's benchmark 
plan premium for 2014 is $9,600 (the benchmark premium for the plan 
covering G, J and K ($12,000), minus the amount allocated to H 
($2,400). Consequently, G's premium tax credit is $4,004 (G's 
benchmark plan premium of $9,600 minus G's contribution amount of 
$5,596 ($58,900 x .095)). G has an excess advance payment of $1,143 
(the excess of the advance credit payments of $5,147 ($6,434 - 
$1,287 allocated to H) over the premium tax credit of $4,004).
    Example 11. Allocation percentage, no agreement on allocation. 
(i) The facts are the same as in Example 10, except that G and H do 
not agree on an allocation percentage. Under paragraph 
(a)(1)(ii)(B)(2) of this section, the allocation percentage is 33 
percent, computed as follows: The number of shifting enrollees, 1 
(K), divided by the number of individuals enrolled by the enrolling 
taxpayer on the same qualified health plan as the shifting enrollee, 
3 (G,J, and K). Thus, H is allocated 33 percent of the items to be 
allocated and G is allocated the remainder of those items.
    (ii) If H is eligible for a premium tax credit, H takes into 
account $4,290 of the premiums for the plan in which K was enrolled 
($13,000 x .33). H, in computing H's benchmark plan premium must 
include $3,960 of G's benchmark plan premium ($12,000 x .33). In 
addition, H is responsible for reconciling $2,123 ($6,434 x .33) of 
the advance credit payments for K's coverage.
    (iii) G's benchmark plan premium for 2014 is $8,040 (the 
benchmark premium for the plan covering G, J, and K ($12,000), minus 
the amount allocated to H ($3,960). Consequently, G's premium tax 
credit is $2,444 (G's benchmark plan premium of $8,040 minus G's 
contribution amount of $5,596 ($58,900 x .095)). G has an excess 
advance credit payment of $1,867 (the excess of the advance credit 
payments of $4,311 ($6,434 - $2,123 allocated to H) over the premium 
tax credit of $2,444).
    Example 12. Allocations for an emancipated child. Spouses L and 
M enroll in a qualified health plan with their child, N. L and M 
attest that they will claim N as a dependent and advance credit 
payments are made for the coverage of all three family members. 
However, N files his own return and claims a personal exemption 
deduction for himself for the taxable year. Under paragraph 
(a)(1)(ii)(B)(1) of this section, L and M are enrolling taxpayers, N 
is a claiming taxpayer and all are subject to the allocation rules 
in paragraph (a)(1)(ii)(B) of this section.

[[Page 43630]]

    Example 13. Taxpayer with advance credit payments allowed a 
section 162(l) deduction but not a limitation on additional tax. (i) 
In 2014, B, B's spouse, and their two dependents enroll in the 
applicable second lowest cost silver plan with an annual premium of 
$14,000. B's advance credit payments attributable to the premiums 
are $8,000. B is self-employed for all of 2014 and derives $75,000 
of earnings from B's trade or business. B's household income without 
including a deduction under section 162(l) for specified premiums is 
$103,700. The Federal poverty line for a family the size of B's 
family is $23,550.
    (ii) Because B received advance credit payments and deducts 
premiums for a qualified health plan under section 162(l), B must 
determine whether B is allowed a limitation on additional tax under 
paragraph (a)(3)(iii) of this section. B begins by testing 
eligibility for the $600 limitation amount for taxpayers with 
household income at less than 200 percent of the Federal poverty 
line for the taxpayer's family size. B determines household income 
as a percentage of the Federal poverty line by taking a section 
162(l) deduction equal to the sum of the amount of premiums not paid 
through advance credit payments, $6,000 ($14,000-$8,000), and the 
limitation amount, $600. The result is $97,100 ($103,700-$6,600) or 
412 percent of the Federal poverty line for B's family size. Since 
412 percent is not less than 200 percent, B may not use a $600 
limitation amount.
    (iii) B performs the same calculation for the $1,500 ($103,700-
$7,500 = $96,200 or 408 percent of the Federal poverty line) and 
$2,500 limitation amounts ($103,700-$8,500 = $95,200 or 404 percent 
of the Federal poverty line), the amounts for taxpayers with 
household income of less than 300 percent or 400 percent, 
respectively, of the Federal poverty line for the taxpayer's family 
size, and determines that B may not use either of those limitation 
amounts. Because B does not meet the requirements of paragraph 
(a)(3)(iii) of this section for any of the limitation amounts in 
section 36B(f)(2)(B), B is not eligible for the limitation on 
additional tax for excess advance credit payments.
    (iv) Although B may not claim a limitation on additional tax for 
excess advance credit payments, B may still be eligible for a 
premium tax credit. B would determine eligibility for the premium 
tax credit and the amounts of the premium tax credit and the section 
162(l) deduction using other rules, including the regulations under 
section 36B and section 162(l), applying no limitation on additional 
tax.
    Example 14. Taxpayer with advance credit payments allowed a 
section 162(l) deduction and a limitation on additional tax. (i) 
Same facts as Example 13, except that B's household income without 
including a deduction under section 162(l) for specified premiums is 
$78,802.
    (ii) Because B received advance credit payments and deducts 
premiums for a qualified health plan under section 162(l), B must 
determine whether B is allowed a limitation on additional tax under 
paragraph (a)(3)(iii) of this section. B first determines that B 
does not meet the requirements of paragraph (a)(3)(iii)(C) of this 
section for using the $600 or $1,500 limitation amounts, the amounts 
for taxpayers with household income of less than 200 percent or 300 
percent, respectively, of the Federal poverty line for the 
taxpayer's family size. That is because B's household income as a 
percentage of the Federal poverty line, determined by using a 
section 162(l) deduction for premiums for the qualified health plan 
equal to the sum of the premiums for the plan not paid through 
advance credit payments and the limitation amount, is more than the 
maximum household income as a percentage of the Federal poverty line 
for which that limitation is available (using the $600 limitation, 
B's household income would be $72,202 ($78,802-($6,000 + $600)), 
which is 307 percent of the Federal poverty line for B's family 
size; and using the $1,500 limitation, B's household income would be 
$71,302 ($78,802-($6,000 + $1,500)), which is 303 percent of the 
Federal poverty line for B's family size).
    (iii) However, B meets the requirements of paragraph 
(a)(3)(iii)(C) of this section using the $2,500 limitation amount 
for taxpayers with household income of less than 400 percent of the 
Federal poverty line for the taxpayer's family size. This is because 
B's household income as a percentage of the Federal poverty line by 
taking a section 162(l) deduction equal to the sum of the amount of 
premiums not paid through advance credit payments, $6,000, and the 
limitation amount, $2,500, is $70,302 (299 percent of the Federal 
poverty line), which is below 400 percent of the Federal poverty 
line for B's family size, and is less than the maximum amount for 
which that limitation is available. Thus, B uses a limitation amount 
of $2,500 in computing B's additional tax on excess advance credit 
payments.
    (iv) B may then determine the amount of the premium tax credit 
and section 162(l) deduction using the rules under section 36B and 
section 162(l), applying the $2,500 limitation amount determined 
above.

    (b)(1) through (b)(2) [Reserved]. For further guidance, see Sec.  
1.36B-4(b)(1) through (b)(2).
    (3) Taxpayers not married to each other at the end of the taxable 
year. Taxpayers who are married (within the meaning of section 7703) to 
each other during a taxable year but legally separate under a decree of 
divorce or of separate maintenance during the taxable year, and who are 
enrolled in the same qualified health plan at any time during the 
taxable year must allocate the benchmark plan premium, the premium for 
the plan in which the taxpayers enroll, and the advance credit payments 
for the period the taxpayers are married during the taxable year. 
Taxpayers must also allocate these items if one of the taxpayers has a 
dependent enrolled in the same plan as the taxpayer's former spouse or 
enrolled in the same plan as a dependent of the taxpayer's former 
spouse. The taxpayers may allocate these items to each former spouse in 
any proportion but must allocate all items in the same proportion. If 
the taxpayers do not agree on an allocation that is reported to the IRS 
in accordance with the relevant forms and instructions, 50 percent of 
the premium for the applicable benchmark plan, the premium for the plan 
in which the taxpayers enroll, and the advance credit payments for the 
married period are allocated to each taxpayer. If for a period a plan 
covers only one of the taxpayers and no dependents, only one of the 
taxpayers and one or more dependents of that same taxpayer, or only one 
or more dependents of one of the taxpayers, then the benchmark plan 
premium, the premium for the plan in which the taxpayers enroll, and 
the advance credit payments for that period are allocated entirely to 
that taxpayer.
    (4) Taxpayers filing returns as married filing separately or head 
of household--(i) Allocation of advance credit payments. Except as 
provided in Sec.  1.36B-2(b)(2)(ii), the premium tax credit is allowed 
to married (within the meaning of section 7703) taxpayers only if they 
file joint returns. See Sec.  1.36B-2(b)(2)(i). Taxpayers who receive 
advance credit payments as married taxpayers and do not file a joint 
return must allocate the advance credit payments for coverage under a 
qualified health plan equally to each taxpayer for any period the plan 
covers and advance credit payments are made for both taxpayers, only 
one of the taxpayers and one or more dependents of the other taxpayer, 
or one or more dependents of both taxpayers. If for a period a plan 
covers or advance credit payments are made for only one of the 
taxpayers and no dependents, only one of the taxpayers and one or more 
dependents of that same taxpayer, or only one or more dependents of one 
of the taxpayers, the advance credit payments for that period are 
allocated entirely to that taxpayer. If one or both of the taxpayers is 
an applicable taxpayer eligible for a premium tax credit for the 
taxable year, the premium tax credit is computed by allocating the 
premiums for the plan in which the taxpayers or their family members 
enroll under paragraph (b)(4)(ii) of this section. The repayment 
limitation described in paragraph (a)(3) of this section applies to 
each taxpayer based on the household income and family size reported on 
that taxpayer's return. This paragraph (b)(4) also applies to taxpayers 
who receive advance credit payments as married taxpayers and file a tax 
return using the head of household filing status.
    (ii) Allocation of premiums. If taxpayers who are married within 
the meaning of section 7703, without regard

[[Page 43631]]

to section 7703(b), do not file a joint return, 50 percent of the 
premiums for a period of coverage in a qualified health plan are 
allocated to each taxpayer. However, all of the premiums are allocated 
to only one of the taxpayers for a period in which a qualified health 
plan covers only that taxpayer, only that taxpayer and one or more 
dependents of that taxpayer, or only one or more dependents of that 
taxpayer.
    (b)(5), Example 1 through Example 8 [Reserved]. For further 
guidance, see Sec.  1.36B-4(b)(5), Example 1 through Example 8.

    Example 9. (i) The facts are the same as in Example 8, except 
that X and Y live apart for over 6 months of the year and X properly 
files an income tax return as head of household. Under section 
7703(b), X is treated as unmarried and therefore is not required to 
file a joint return. If X otherwise qualifies as an applicable 
taxpayer, X may claim the premium tax credit based on the household 
income and family size X reports on the return. Y is not an 
applicable taxpayer and is not eligible to claim the premium tax 
credit.
    (ii) X must reconcile the amount of credit with advance credit 
payments under paragraph (a) of this section. The premium for the 
applicable benchmark plan covering X and his two dependents is 
$9,800. X's premium tax credit is computed as follows: $9,800 
benchmark plan premium minus X's contribution amount of $5,700 
($60,000 x .095) equals $4,100.
    (iii) Under paragraph (b)(4) of this section, half of the 
advance payments ($6,880/2 = $3,440) is allocated to X and half is 
allocated to Y. Thus, X is entitled to $660 additional premium tax 
credit ($4,100-$3,440). Y has $3,440 excess advance payments, which 
is limited to $600 under paragraph (a)(3) of this section.
    Example 10. (i) A is married to B at the close of 2014 and they 
have no dependents. A and B are enrolled in a qualified health plan 
for 2014 with an annual premium of $10,000 and advance credit 
payments of $6,500. A is not eligible for minimum essential coverage 
(other than coverage described in section 5000A(f)(1)(C)) for any 
month in 2014. A is a victim of domestic abuse as described in Sec.  
1.36B-2(b)(2)(iii). At the time A files her tax return for 2014, A 
is unable to file a joint return with B for 2014 because of the 
domestic abuse. A certifies on her 2014 return, in accordance with 
relevant instructions, that she is living apart from B and is unable 
to file a joint return because of domestic abuse. Thus, under Sec.  
1.36B-2(b)(2)(ii), A satisfies the joint return filing requirement 
in section 36B(c)(1)(C) for 2014.
    (ii) A's family size for 2014 for purposes of computing the 
premium tax credit is one and A is the only member of her coverage 
family. Thus, A's benchmark plan for all months of 2014 is the 
second lowest cost silver plan offered by the Exchange for A's 
rating area that covers A. A's household income includes only A's 
modified adjusted gross income. Under paragraph (b)(4)(ii) of this 
section, A takes into account $5,000 ($10,000 x .50) of the premiums 
for the plan in which she was enrolled in determining her premium 
tax credit. Further, A must reconcile $3,250 ($6,500 x .50) of the 
advance credit payments for her coverage under paragraph (b)(4)(i) 
of this section.

    (c) Effective/applicability date. Paragraphs (a)(1)(ii), 
(a)(3)(iii), (a)(4), Examples 4, 10, 11, 12, 13, and 14, (b)(3), 
(b)(4), and (b)(5), Examples 9 and 10 apply to taxable years beginning 
after December 31, 2013.
    (d) Expiration date. Paragraphs (a)(1)(ii), (a)(3)(iii), (a)(4), 
Examples 4, 10, 11, 12, 13, and 14, (b)(3), (b)(4), and (b)(5), 
Examples 9 and 10 expire on July 24, 2017.

0
Par. 8. Section 1.162(l)-1T is added to read as follows:


Sec.  1.162(l)-1T  Deduction for health insurance costs of self-
employed individuals (temporary).

    (a) Coordination of section 162(l) deduction for taxpayers subject 
to section 36B--(1) In general. A taxpayer is allowed a deduction under 
section 162(l) for specified premiums, as defined in paragraph (a)(2) 
of this section, not to exceed an amount equal to the lesser of--
    (i) The specified premiums less the premium tax credit attributable 
to the specified premiums; and
    (ii) The sum of the specified premiums not paid through advance 
credit payments, as described in paragraph (a)(3) of this section, and 
the additional tax (if any) imposed under section 36B(f)(2)(A) and 
Sec.  1.36B-4(a)(1) with respect to the specified premiums after 
application of the limitation on additional tax in section 36B(f)(2)(B) 
and Sec.  1.36B-4(a)(3).
    (2) Specified premiums. For purposes of paragraph (a)(1) of this 
section, specified premiums means premiums for a specified qualified 
health plan or plans for which the taxpayer may otherwise claim a 
deduction under section 162(l). For purposes of this paragraph (a)(2), 
a specified qualified health plan is a qualified health plan, as 
defined in Sec.  1.36B-1(c), covering the taxpayer, the taxpayer's 
spouse, or a dependent of the taxpayer (enrolled family member) for a 
month that is a coverage month within the meaning of Sec.  1.36B-3(c) 
for the enrolled family member. If a specified qualified health plan 
covers individuals other than enrolled family members, the specified 
premiums include only the portion of the premiums for the specified 
qualified health plan that is allocable to the enrolled family members 
under rules similar to Sec.  1.36B-3(h), which provides rules for 
determining the amount under Sec.  1.36B-3(d)(1) when two families are 
enrolled in the same qualified health plan.
    (3) Specified premiums not paid through advance credit payments. 
For purposes of paragraph (a)(1)(ii) of this section, specified 
premiums not paid through advance credit payments equal the amount of 
the specified premiums minus the advance credit payments attributable 
to the specified premiums.
    (b) Additional guidance. The Secretary may provide by publication 
in the Federal Register or in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2) of this chapter) additional guidance on coordinating the 
deduction allowed under section 162(l) and the credit provided under 
section 36B.
    (c) Effective/applicability date. This section applies for taxable 
years beginning after December 31, 2013.
    (d) Expiration date. This section expires on July 24, 2017.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: July 22, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-17695 Filed 7-24-14; 4:15 pm]
BILLING CODE 4830-01-P