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Guide to premium tax credits for health insurance

Written by: Gabrielle Smith
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Published on October 4, 2022.

With the recent passage of the Inflation Reduction Act in the summer of 2022, there's been a lot of talk about the extension of federal advance premium tax credits (APTC) and lowering health insurance costs. But, what is a tax credit for health insurance, and what do these subsidies have to do with how much you pay for health insurance?

In this article, we'll cover what premium tax credits are, who qualifies for them, and how to calculate exactly how much you can expect to pay for health insurance premiums.

Interested in a health benefit that doesn't impact your employees' premium tax credit eligibility? Learn more about employee stipends with our free guide


What are premium tax credits?

Premium tax credits1, also known as health insurance premium subsidies, are a type of tax subsidy created by the U.S. government in 2014 to provide discounts for health insurance coverage to eligible individuals and families.

You can receive premium tax credits on your federal income tax return or choose advance payment to help pay for monthly insurance premiums.

The subsidy was designed to help lower-income Americans buy affordable individual or family health insurance coverage through the health insurance marketplaces, also known as exchanges, created by the Affordable Care Act (ACA).

The American Rescue Plan Act (ARP) was signed into law by President Joe Biden in March 2021, expanding eligibility for the subsidies. These enhanced tax credits were originally set to expire at the end of 2022. However, Congress passed the Inflation Reduction Act2 in August of 2022, which further extended the enhanced premium tax credits through 2025.

How do you qualify for a premium tax credit?

Up until the American Rescue Plan was put into place as part of the COVID-19 public health emergency, premium tax credit eligibility was determined by your actual income in relation to federal poverty guidelines. People with incomes between 100% and 400% of the federal poverty level (between $12,760 and $51,040 if you're single) were eligible for premium tax credits if they didn't have affordable coverage through an employer or government program—that includes Medicare and Medicaid.

So how much money can you save with the healthcare tax credit? The amount you could save was based on the percent of income relative to the FPL and your family size. Your healthcare subsidy would cap the cost of health insurance between 2% and 9.5% of your annual income.

Fast forward to today, and there's no longer a maximum income for the eligibility requirements. All Americans who purchase health insurance under the federal exchanges or state-run markets will pay no more than 8.5% of their actual household income for the benchmark plan (silver level) through the end of 2025.

Lawfully residing immigrants with incomes below the poverty line can also receive tax credits if they aren't eligible for Medicaid.

Here's how the old ACA rules compare to what's been put in place by the American Rescue Plan and Inflation Reduction Act:

Current subsidy cliff vs. proposed changes, premium tax credits, health care, subsidy

Under both the new and old system, employees with employer-sponsored coverage are only eligible for tax credits if their premiums are considered unaffordable. Affordability is based on only the employee for employer coverage.

This means that you wouldn't be eligible for tax credits if it's affordable for just the employee, even if your employer-sponsored minimum essential coverage (MEC) plan is unaffordable for your family income. This is known as the "family glitch." The Biden administration is currently hoping to address this sometime in 2023.

How do I calculate my premium tax credits?

Several online tools are available to help you calculate your premium tax credits, including the Kaiser Family Foundation's Health Insurance Marketplace Calculator3.

This tool estimates what you will pay for health insurance and how likely you are to be eligible for a premium tax credit based on the personal information you provide.

We'll walk you through how it works.

How to use the health insurance premium and tax credit calculator

First, click here to get to the calculator. Once you're there, you'll enter your basic personal information and click submit when you're finished.

The information you'll enter includes:

  • State
  • Zip code
  • Household income
  • Whether or not you have job-based coverage
  • Total number of people in your family
  • Number and ages of adults in your family
  • Number and ages of children in your family
  • Whether or not you are a tobacco user (there's often a tobacco surcharge on insurance premiums)

These are all factors that can affect how much subsidy you can claim.

Tip: Be sure to enter all of the information as accurately as possible for the best results, including your household income (which is calculated using MAGI).

Example for a single adult in Arkansas earning $52,000/year

Let's take a look at an example so you can see how it all works.

Here we have a health insurance premium and tax credit estimate for a single adult living in Arkansas, earning $52,000/year.

KFF premium tax credit estimate for a single adult in Arkansas, premium tax credit, subsidy, health care premium

This example shows the difference the American Rescue Plan made in lowering health insurance premiums for Americans on the edge of the subsidy cliff.

Before, a single adult in Arkansas making $52,000 would have barely missed the cutoff for receiving a premium tax credit by less than $1,000, forcing them to pay the full premium of $836/month ($10,031) for self-only coverage.

Now, a single adult making $52,000 would qualify to receive a premium tax credit of $468/month ($5,611/year) and pay only $368/month ($4,420/year) for a lowest-cost silver plan.

Example for a family of three in Utah earning $70,000/year

Here's a look at a health insurance premium and tax credit estimate for a family of three living in Utah earning $70,000/year.

KFF premium tax credit estimate for a family of three in Utah, premium tax credit, subsidy, health care premium

In this example, the family would pay about $383/month ($4,592/year) for a family coverage silver plan, receiving a premium tax credit of $1,064/month ($12,768/year). Without financial help, the silver plan would be $1,447/month ($17,360/year) based on their family size.

If you qualify for a tax credit, using it can be a great idea for lowering your monthly healthcare costs.

How do I access the premium tax credits?

You may wonder, does the premium tax credit work with any type of insurance? No; to receive your premium tax credit, you must purchase health insurance through the federal marketplace, healthcare.gov4, or your state's marketplace.

You can purchase a qualified health plan during your state's open enrollment period. Otherwise, you can only get health coverage during a special enrollment period (SEP).

Most states have a website where you can view and compare policies, enroll in a plan, and receive the premium tax credit. A licensed health insurance broker is a great resource for help selecting a health plan.

It's important to note that while federal and state marketplaces will display catastrophic plans as an option for those under 30, they aren't eligible for premium tax credits.

If you elect to receive premium tax credits on your tax return, you will receive your subsidies as a refund when you file IRS Form 8962. This is because they are considered refundable tax credits, meaning, unlike other subsidies, you'll receive the full amount even if you owe fewer taxes than your credit amount.

Does the premium tax credit have to be paid back?

If you receive premium tax credits, you don't have to pay the credit back during tax time, as you'll receive your credit on your tax return of tax refunds. But, you can also use what's called the Advance Premium Tax Credit (APTC) to lower your marketplace coverage monthly premium.

If you've taken more advance credit payments than you are eligible to receive, you have to pay the excess advance payments back to the Internal Revenue Service (IRS) on your income tax return.

How do you reconcile APTC5 with the actual subsidy on your federal income tax return? You'll need Form 1065-A and Form 8962 for your repayment. Once filled out, you'll see the amount that will affect your refund for the tax year.

How do I coordinate premium tax credits with HRAs?

Health reimbursement arrangements (HRAs) allow employers to reimburse employees for individual health insurance policies and out-of-pocket costs tax-free. Employees can choose their own health plan, and their employer reimburses them for premiums and other qualifying medical expenses up to their monthly allowance.

This gives employees more freedom to choose an affordable coverage option than traditional employer-sponsored coverage while saving employers money. But what about employees with premium tax credits? How can they take advantage of an HRA?

Because HRA allowances pay for health insurance premiums with tax-free money, employees must account for their allowance and any premium tax credits or advanced payment. However, this works differently under each type of HRA.

With a qualified small employer HRA (QSEHRA), employees can keep their health coverage tax credit and participate in the QSEHRA. However, employees must reduce their subsidy by the amount of their QSEHRA allowance, and they don't have the option to opt-out.

If your employer offers an individual coverage HRA (ICHRA), you must choose between the ICHRA or your premium tax credits. You can waive your subsidy altogether if your ICHRA is considered affordable. But, if it's not considered affordable, you can opt out of the ICHRA and continue collecting your premium tax credits.

How do you coordinate premium tax credits with stipends?

There's another option for employers looking to offer a health coverage benefit to employees with premium tax credits, which is through stipends.

Healthcare stipends are taxable allowances provided to employees to cover health-related costs, including insurance premiums and out-of-pocket expenses. Some stipends are offered up-front like a bonus, while others are paid through reimbursements, much like an HRA.

Because stipends are taxable non-wage income, they can be offered to employees who receive premium tax credits. This allows employees to participate in their employer's benefits package while still taking advantage of their tax credits.

If you provide a large monthly allowance, you could impact your employees' actual credit. Because stipends are considered taxable wages, they can cause an increase in household income. But, stipends generally work alongside tax credits.

Just keep in mind that employees will be responsible for paying any federal income tax liability on the stipend amounts they receive.

Conclusion

Premium tax credits can be a valuable way to lower the cost of your health insurance premiums, especially for low-income families. With the passage of the American Rescue Plan and Inflation Reduction Act, it's now easier than ever to get affordable coverage through a marketplace plan so your employees and their families can stay safe and healthy.

However, by providing a personalized health benefit, you can help your employees with their medical expenses, often above what premium tax credits can provide. Are you interested in offering an HRA or health stipend to your employees? PeopleKeep can help!

Our personalized benefits administration software allows you to easily set up and manage HRAs and employee stipends.

Connect with a personalized benefits advisor today to see how HRAs and stipends can fit your organization!

This blog article was originally published on November 17, 2014. It was last updated on October 4, 2022.

1. https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit

2. https://www.kff.org/policy-watch/five-things-to-know-about-renewal-of-extra-affordable-care-act-subsidies-in-inflation-reduction-act/

3. https://www.kff.org/interactive/subsidy-calculator/

4. https://www.healthcare.gov/

5. https://www.healthcare.gov/taxes-reconciling/

Originally published on October 4, 2022. Last updated October 4, 2022.
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