Health Insurance Tax Credits to Help Millions of Middle-Class Families in Affordable Insurance Exchanges

As part of new regulations under Obama’s health care legislation the U.S. Department of the Treasury and the Department of Health and Human Services (HHS) today took the next steps to establish Affordable Insurance Exchanges – one-stop marketplaces where consumers can choose a private health insurance plan that fits their health needs and have the same kind of insurance choices as members of Congress.

Among other policies, the proposed regulations describe how individuals and families will gain access to health insurance premium tax relief credits to help reduce the cost of coverage. Here are some key details of the credit and how it can be claimed:

Health Insurance Premium Tax Credit. Individuals and families will receive the premium tax credits to help defray insurance cost and increase access to health coverage for millions uninsured American families. The Congressional Budget Office (CBO) estimates that, when the Affordable Care Act is fully phased in, individuals receiving premium tax credits will get an average subsidy of over $5,000 per year.

The credit amount is generally equal to the difference between the premium for the “benchmark plan” and the taxpayer’s “expected contribution.” The expected contribution is a specified percentage of the taxpayer’s household income. The percentage increases as income increases, from 2% of income for families at 100% of the federal poverty level (FPL) to 9.5% of income for families at 400% of FPL.

The benchmark plan is the second-lowest-cost plan that would cover the family at the “silver” level of coverage. The credit is capped at the premium for the plan the family chooses, so no one receives a credit that is larger than the amount they actually pay for their plan.

Eligibility. The IRS and treasury have released guidelines around who would be eligible for this tax credit – an individual or family must be legal tax-paying residents with household income for the taxable year between 100 percent and 400 percent of the federal poverty line (approximately $22,350 – $89,400 for a family of four). They cannot claim the credit if they are eligible for Medicaid, Medicare or other health subsidy programs. The CBO estimates that, when the Affordable Care Act is fully phased in, the premium tax credit will help 20 million Americans afford health insurance.

Tax credits are available to qualified individuals offered (but not enrolled in) employer-sponsored insurance if (a) it is “unaffordable” (meaning that the self-only premium exceeds 9.5% of household income); or (b) it does not provide a minimum value (meaning it fails to cover 60% of total allowed costs). Eligible individuals won’t be able to use tax credits to purchase health coverage through an Exchange until 2014, when the health tax credit becomes effective.

Larger Tax Credits for Older Americans who face higher premiums. The amount of the premium tax credit is tied to the amount of the premium, so that older Americans who face higher premiums will receive a greater credit.

Credit Is Refundable. The premium tax credit is fully refundable, so even moderate-income families who may have little federal income tax liability (but who may pay a higher share of their income towards payroll taxes and other taxes) can receive the full benefit of the credit.

How the Premium Tax Credit Works. The credit is advanceable, with advance payments made directly to the insurance company on the family’s behalf. The advance payments are then reconciled against the amount of the family’s actual premium tax credit, as calculated on the family’s federal income tax return. Any repayment due from the taxpayer is subject to a cap for taxpayers with incomes under 400% of FPL. The caps range from $600 for married taxpayers ($300 for single taxpayers) with household income under 200% of FPL to $2,500 for married taxpayers ($1,250 for single taxpayers) with household income above 300% but less than 400% of FPL.

Example: A Family of four with income of $50,000 purchases a benchmark plan (on which the premium tax credit is generally set). The family’s expected contribution is a percentage of the family’s household income. The following are the key calculations in figuring the credit and contribution:

• Income as a Percentage of FPL 224%
• Expected Family Contribution: $3,570
• Premium for Benchmark Plan: $9,000
• Premium Tax Credit: $5,430 ($9,000 – $3,570)
• Premium for Plan Family Chooses: $9,000
• Actual Family Contribution: $3,570

Easier Access to Coverage for Consumers and Small Businesses. New rules will make it easy for consumers to enroll in high-quality health plans and get help paying for health coverage eith the above premium tax credits and cost sharing reductions. Small employers participating in the Small Business Health Options Program (SHOP) will be able to offer their employees a choice of health plans and cut their costs with new tax credits. See more details on eligibility rules for current small business health care tax credits.

The Treasury has also proposed rules that will provide a simple, streamlined, and affordable path for consumers to use the affordable health care exchanges to purchase private health insurance and to take advantage of the new tax credits available to individuals, families and small business.

These rules and health exchange setups are still being refined and in the weeks ahead, the Administration will conduct an aggressive outreach campaign and ask for public comment on the proposed regulations from employers, consumers, State leaders, health care providers and insurers, and the American people.

Subscribe via email or follow us on Facebook, Twitter or YouTube to get the latest news and updates

Leave a Comment