WASHINGTON—Senate Democratic and Republican leaders agreed on a new approach to consider legislation to increase federal health insurance premium subsidies for employees who lose their jobs due to foreign competition and older retirees in failed pension plans.

Senate Finance Committee Chairman Max Baucus, D-Mont., previously proposed, with support from the Obama administration, increasing the Health Coverage Tax Credit as part of a free-trade agreement with South Korea. However, Republican panel members opposed the approach and boycotted a hearing on the issue.

On Wednesday, Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., announced an agreement in which there would be separate votes on legislation to extend the Trade Adjustment Assistance law, which contains the health premium subsidy provisions, and the South Korean trade pact and two other trade pacts with Colombia and Panama.

Previously, House Ways and Means Committee Chairman Dave Camp, R-Mich., said his panel would consider extending the TAA health premium subsidy provision, so long as it was not included in a free trade agreement.

Subsidy reverted to 65%

The HCTC was created in 2002 and included as part of the Trade Adjustment Assistance law. Federal lawmakers set the subsidy as a 65% federal tax credit. In 2009, an economic stimulus law raised the credit to 80% through Dec. 31, 2010, and Congress last year approved a temporary extension through Feb. 13. The subsidy reverted to 65% after lawmakers in February could not agree on another extension.

The administration said it would back raising the tax credit to 72.5% and letting the credits expire after Dec. 31, 2013. That is when key provisions of the health care reform law begin, including federal health insurance premium subsidies for the lower-income uninsured. Sen. Baucus incorporated the 72.5% subsidy as part of a draft free-trade agreement with South Korea that he unveiled in June.

Aside from those who lose their jobs due to foreign competition, the subsidy is available to those at least age 55 whose pension plans have been taken over by the Pension Benefit Guaranty Corp.

Can be used to offset COBRA

The HCTC can be used to offset the cost of a variety of health insurance plans, including COBRA continuation coverage and individual plans offered by commercial insurers.

Nearly 60% of beneficiaries use the credit to pay COBRA premiums.

Unlike other federal tax credits, the HCTC is available regardless of whether an individual pays any federal taxes.

Under a system implemented by the Internal Revenue Service, the beneficiary pays 35% of his or her premium to the government. Then the IRS remits the full amount to the health plan or plan administrator.