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 Treasury Finalizes Regulations On Tax Credits To Help Make Health Insurance Affordable For Middle-Class Americans


5/18/2012

The Affordable Care Act established 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. Today, the Treasury Department issued final regulations implementing the premium tax credit that will give middle-class Americans unprecedented tax benefits to make the purchase of health insurance affordable.

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The Premium Tax Credit:
  • Makes Coverage Affordable. Starting in 2014, millions of Americans will get help to purchase private health coverage through an Affordable Insurance Exchange. To make coverage affordable, the level of support is tailored to individuals' needs.
  • Provides a Substantial Benefit. The Congressional Budget Office estimates that, when the Affordable Care Act is fully implemented, individuals and families who qualify for assistance will receive premium tax credits of over $5,000 per year on average.
  • Builds on What is Best in the Existing Health Care System. The Affordable Care Act includes crucial safeguards to ensure that the coverage purchased on an Affordable Insurance Exchange with the premium tax credits will supplement – not supersede – existing employer- and government-sponsored health programs. This allows Americans to keep the coverage they have.
  • Includes Special Protections For Married Couples. The final regulations include a new taxpayer-friendly rule aimed at addressing the concern that individuals who marry during the year could receive reduced tax benefits.
Key Facts about the Premium Tax Credit:

·         Broad Middle-Class Eligibility.  The premium tax credit is generally available to individuals and families with incomes between 100 percent and 400 percent of the federal poverty level (or $22,350 to $89,400 for a family of four in 2011.  The Congressional Budget Office estimates that, when fully implemented, the Affordable Care Act will provide premium tax credits to help 18 million Americans afford private health insurance.
·         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 can receive a larger tax credit. 
·         Controls Health Care Costs by Encouraging Families to Choose More Cost-Effective Coverage.  The amount of the premium tax credit is generally fixed based on a benchmark plan (which may be age- adjusted within Affordable Care Act limitations), so families that choose to purchase coverage that is less expensive than the benchmark plan will pay less towards the cost of that coverage. 
·         Credit Is Refundable So Even Families with Modest Incomes Can Benefit.  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.
·         Helps Families' Cash-Flow by Covering Premiums Upfront.  Since many low- and moderate-income families may not have sufficient cash on hand to pay the full premium upfront, an advance payment of the premium tax credit will be made by the Department of the Treasury directly to the insurance company.  This advance payment will assist families to purchase the health insurance they need. 
How the Premium Tax Credit Works
Eligibility
  • Household income must be between 100% and 400% of the Federal Poverty Level.
  • Covered individuals must be enrolled in a "qualified health plan" through an Affordable Insurance Exchange.
  • Covered individuals must be legally present in the United States and not incarcerated.
  • Covered individuals must not be eligible for other qualifying coverage, such as Medicare, Medicaid, or affordable employer-sponsored coverage.
Credit Amount
  • 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 actual amount a family pays for coverage will be less than the expected contribution if the family chooses a plan that is less expensive than the benchmark plan.)
  • 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 that no one receives a credit that is larger than the amount they actually pay for their plan).
Special Rules
  • The credit is advanceable, with advance payments made directly to the insurance company on the family's behalf. At the end of the year, the advance payments are 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 final regulations include a special rule allowing individuals who marry during the year to use an alternative credit calculation intended to protect them from receiving a lower credit than similarly situated taxpayers who do not marry.  
 

Premium Tax Credit Calculation: Three Examples

 

Example 1: Family of Four with Income of $50,000, Purchases Benchmark Plan

The premium tax credit is generally set based on the benchmark plan.  The family's expected contribution is a percentage of the family's household income. 

  • 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

 

 

Example 2: Family of Four with Income of $50,000, Purchases Less Expensive Plan

If a family chooses a plan that is less expensive than the benchmark plan, the family will generally pay less.

  •    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:        $7,500
  •    Actual Family Contribution:                        $2,070  ($7,500 - $5,430)

 

 

Example 3: Family of Four with Income of $50,000, Parents are between the ages of 55 and 64

Because premiums are generally higher for older individuals, the premium tax credit also is higher for these individuals.

  •    Income as a Percentage of FPL                  224%
  •    Expected Family Contribution:                   $3,570
  •    Premium for Benchmark Plan:                  $14,000
  •    Premium Tax Credit:                                    $10,430 ($14,000 - $3,570)
  •    Premium for Plan Family Chooses:         $14,000
  •    Actual Family Contribution:                         $3,570

 

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