What better way to pass these hot summer days than a cool glass of lemonade and the federal health care reform primer? Don't answer that. Just read on about the premium tax credits available under the federal Patient Protection and Affordable Care Act. And get ready for some math.
Starting in 2014, taxpayers with household incomes between 100 percent and 400 percent of the federal poverty line for their family size may receive monthly premium assistance (in the form of federal income tax credits) in an amount equal to:
- The monthly premium for one or more qualified health plans, offered in the state's individual market and enrolled in through the state's exchange, covering the taxpayer, his or her spouse, and/or his or her dependents; or
- The excess (if any) of the adjusted monthly premium for the applicable second lowest cost silver plan for the taxpayer over 1/12 of the applicable percentage multiplied by the taxpayer's household income
Whichever is less.
Want that in English? Let's start by explaining those terms in bold.
The applicable second lowest cost silver plan (see my prior explanation of gold, silver and bronze plans) is the second lowest cost silver plan of the individual market in the rating area where the taxpayer resides. It must be offered through the same exchange that offered the plan the taxpayer actually bought and must provide either self-only coverage or family coverage.
The adjusted monthly premium is the premium that would have been charged for the "applicable second lowest cost silver plan" if it had covered each covered individual and if the premium had been adjusted only to reflect the ages of the covered individuals.
The applicable percentage is a number between 2.8 and 9.8 percent. It's calculated by adding 2.8 to the result of the following formula:
Annual household income minus 100% of the federal poverty line X 7
200% of the federal poverty line
For example, assume a family of four with a household income of $40,000. The 2011 federal poverty line for a family of four is $22,350. Our calculation looks like this:
$40,000 - $22,350 X 7
0.39485 X 7 = 2.8
Applicable percentage = 2.8 + 2.8 = 5.6
Still with me? To figure out this family's monthly premium tax credit, you need to know A) the monthly cost of the plan they bought, and B) the adjusted monthly premium for the second lowest cost silver plan in their rating territory. Let's assume that their actual monthly premium is $1,200 and the adjusted premium for the second lowest cost silver plan is $1,000. Our new calculation is:
Adjusted monthly premium for second lowest cost silver plan - (1/12 X applicable percentage X annual household income)
$1,000 - (5.6% X $40,000
$1,000 - ($2,240/12)
$1,000 - $187 = $813
We now compare this to the amount they're actually spending on their plan ($1,200 per month.) Since $813 is less than $1,200, this family gets a tax credit of $813 for each covered month for the purchase of health insurance. Their net cost for health insurance falls from $1,200 to $387 per month.
An exception applies for families with incomes between 100 percent and 133 percent of the poverty line. The applicable percentage for a family in this category is a flat 2 percent. In my example above, if the family's household income is $25,000 (112 percent of the poverty line), the tax credit jumps to $958, reducing their net monthly cost for health insurance to $242. That may look small, but it's still more than 11 percent of the household's monthly income. Not exactly a free ride.
A few final notes:
- To qualify for the credit, married couples must file joint tax returns.
- The federal Treasury Department must adjust the applicable percentage calculation each year to reflect the amount that premium growth exceeds income growth.
- The amounts used in the calculation for monthly premium and adjusted monthly premium for the second lowest cost silver plan may not include the cost of benefits above and beyond the essential health benefits, whether required by state law or offered voluntarily by the plan. However, they do include the costs of pediatric dental plans.
- Legal aliens who are ineligible for Medicaid are considered to have a household income equal to 100 percent of the poverty line.
- The premiums used for calculating the credit are reduced by the amount of premium attributable to each covered person who is an illegal alien. A similar reduction applies to the calculation of the ratio of household income to the federal poverty line.
- If a taxpayer has taken an advance payment of the credit (I'll cover that in a later post,) the amount of the actual credit is reduced by the amount of the advance. If the amount of the advance is greater than the amount of the actual credit, the taxpayer will owe the excess as an additional tax. The additional tax is capped at $400 for families below 400 percent of the poverty line, and the cap will be indexed each year to increase with the cost of living.
- The U.S. Comptroller General must conduct a study on how the tax credits have impacted maintaining and expanding health insurance coverage for individuals, the availability of affordable health plans, and the ability of individuals to maintain coverage. A report on the study is due to Congress by by March 23, 2015.
I know this post is heavy on technical tax detail, but I think it's important to know what the government intends to do to help people pay for health insurance. Many have argued that the country cannot afford these premium subsidies, while others argue that the country cannot afford the financial strain of tens of millions of uninsured people. I won't argue one side of the other; my purpose here is just to show you how the numbers work for you, your families, and your clients.
I'll be back shortly with a new post on the reduced cost-sharing provisions for individuals.