With the recent passage of the American Rescue Plan Act of 2021, there’s been a lot of talk about the changes made to premium tax credits and lowering health insurance costs—but what exactly are premium tax credits, and what do they 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.
What are the premium tax credits?
Premium tax credits, also known as health insurance premium subsidies, were created by the U.S. government in 2014 as a way to provide discounts for health insurance to eligible individuals and families.
The discounts were 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.
How do you qualify for a premium tax credit?
Up until the American Rescue Plan was put into place, you were considered eligible for a premium tax credit if your household income fell between 100% and 400% of the federal poverty line (between $12,760 and $51,040 if you’re single) and if you didn’t have affordable coverage through an employer or government program—that includes Medicare and Medicaid.
Your tax credit would cap the cost of health insurance between 2% and 9.5% of your annual household income, depending on how much money you made relative to the FPL.
Fast forward to today, and now all Americans who purchase health insurance under the federal exchanges or state-run markets will pay no more than 8.5% of their household income through the end of 2022.
Here’s how the old rules compare to what’s been put in place by the American Rescue Plan:
How do I calculate my premium tax credits?
There are several online tools available to help you calculate your premium tax credits, including the Kaiser Family Foundation’s Health Insurance Marketplace Calculator.
This tool gives you an estimate on 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:
- 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 use tobacco
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.
This example shows what a difference the American Rescue Plan made in lowering health insurance premiums for Americans who were on the edge of the subsidy cliff.
Before, a single adult in Arkansas making $52,000 would have just 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).
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 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.
In this example, the family would pay about $383/month ($4,592/year) for a 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).
How do I access the premium tax credits?
To receive your premium tax credit, you must purchase health insurance through the federal marketplace, healthcare.gov, or your state's marketplace.
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. Look up your state marketplace here.
Are there other ways to save on health insurance premiums?
Aside from premium tax credits, your employer can also help you with the cost of your individual health insurance plan by setting up a health reimbursement arrangement (HRA).
Through an HRA, you choose your own individual insurance plan, and your employer reimburses you for the cost of the premium and other qualifying medical expenses up to your monthly allowance.
What’s more, if you’re enrolled in the qualified small employer HRA (QSEHRA) you can even coordinate your premium tax credits with your HRA allowance—your premium tax credit will simply be reduced by your allowance amount.
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, it’s now easier than ever to get the affordable coverage you and your family need to stay safe and healthy.
This article was originally published November 17, 2014. It was updated March 15, 2021.