If this is your first time shopping for health insurance, you may be wondering how federal advance premium tax credits (APTC) can help you lower your monthly premiums. Knowing how to use APTCs to your advantage to reduce the cost of healthcare is more important than ever—especially with the creation of the 2022 Inflation Reduction Act1.
But what is a health insurance tax credit, and what do these subsidies have to do with how much you’ll pay?
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 premium tax credits?
Premium tax credits, also known as health insurance premium subsidies, are a type of tax subsidy the U.S. government created 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 immediately help pay for monthly insurance premiums throughout the year.
The subsidy provides financial assistance for lower-income Americans to buy affordable self-only or family health insurance coverage through the Health Insurance Marketplaces, also known as exchanges, created by the Affordable Care Act (ACA).
Originally, premium tax credits could only be claimed by households that didn’t hit an income cap. However, the American Rescue Plan Act (ARP), which was signed into law in March 2021, expanded eligibility for the subsidies. Initially, these enhanced tax credits were set to expire at the end of 2022. However, Congress passed the Inflation Reduction Act in August 2022, extending the enhanced premium tax credits through 2025.
How do you qualify for a premium tax credit?
Until the federal government implemented the American Rescue Plan as part of the COVID-19 public health emergency, premium tax credit eligibility criteria depended on how your actual income related to federal poverty guidelines.
People with annual incomes between 100% and 400% of the federal poverty level were eligible for premium tax credits if they weren’t offered affordable coverage through an employer or government program—that includes Medicare and Medicaid. The 2023 federal poverty level annual income threshold is $14,580 for single individuals and $30,000 for a family of four.
The amount you could save depended on what your income was 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.
Today, there's no longer a maximum income for eligibility requirements. All Americans who purchase health insurance under the federal exchanges or state-run markets will pay at most 8.5% of their actual household income for the benchmark plan (silver level) through the end of 2025.
Lawfully residing immigrants with an actual income below federal poverty guidelines can also receive tax credits if they aren't eligible for Medicaid. While undocumented immigrants aren’t eligible for federal premium tax credits, some states2 offer tax credits to these individuals so they can purchase coverage on private exchanges.
Here's how the old ACA rules compare to the current regulations under the Inflation Reduction Act.
Under both the new and old system, employees with employer coverage are only eligible for tax credits if their premiums are unaffordable. Affordability is only based on the employee’s income—not their total household income—when it comes to determining if employer coverage is considered affordable.
This means you wouldn't be eligible for tax credits if your employer-sponsored plan is affordable for just you, but would be considered unaffordable for your family income. This is known as the "family glitch."
To remedy the family glitch, the Biden Administration announced a change3 for 2023. Affordability for a family employer-sponsored health plan is now based on the cost to cover the employee and their eligible dependents instead of just the cost of covering the employee.
How do I calculate my premium tax credit amounts?
Several online tools are available to help you calculate your premium tax credit amount, including the KFF's Health Insurance Marketplace Calculator4. This tool estimates what you will pay for health insurance and how likely you will be eligible for a premium tax credit based on the personal information you provide, like family size, ZIP code, and household income.
We'll walk you through how it works.
How to use the health insurance premium and tax credit calculator
First, open the KFF Marketplace calculator. Once you're there, you'll enter your basic personal information and click submit when you finish.
The information you'll enter includes:
- ZIP code
- Actual 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. Be sure to enter all of the information as accurately as possible for the best results, including your household income and your modified adjusted gross income (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.
Below, we have a health insurance premium and federal tax credit estimate for a single adult living in Arkansas, earning $52,000/year.
This example shows the difference the Inflation Reduction Act made in lowering monthly premium payments for Americans on the edge of the subsidy cliff.
Before, a single adult in Arkansas making $52,000 would still have qualified for a premium tax credit because they’re income is 357% of the poverty level. But, the Inflation Reduction Act makes the calculation more straightforward with greater savings.
Now, a single adult making $52,000 would qualify for a premium tax credit of $580/month ($6,956/year) and pay only $322/month ($3,858/year) for a lowest-cost silver plan. Without financial help, the silver plan would be $901/month ($10,814/year) based on their single family size.
Example for a family of three in Utah earning $70,000/year
Here's 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 $307/month ($3,682/year) for a family coverage silver plan, receiving a premium tax credit of $1,450/month ($17,397/year). Without financial help, the silver plan would be $1,757/month ($21,079/year) based on their family size.
If you qualify for a tax credit, using it can be an excellent 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 Health Insurance Marketplace or your state's marketplace. You don’t qualify for tax credits if you purchase an individual policy on a private exchange (such as directly from an insurance company).
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 also 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 89625. This is because the IRS considers them refundable 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 advance premium tax credits (APTCs) to lower your marketplace coverage monthly premium.
If you've taken more advance credit payments than you’re eligible to receive, you must pay the excess advance payments back to the Internal Revenue Service (IRS) on your federal income tax return.
How do you reconcile APTC6 with the actual subsidy on your federal income tax return? You'll need Form 1065-A7 and Form 8962 for your repayment. Once filled out, you'll see the amount that will affect your refund for the tax year.
As always, if you need help filing out your tax forms, consult a tax advisor for professional assistance.
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 individual health coverage over 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.
If you have a qualified small employer HRA (QSEHRA), your eligibility to receive premium tax credits) depends on whether your benefit is affordable8. If your QSEHRA is affordable for a given month, you can’t collect your tax credits for that month. If your benefit isn’t considered affordable for one or more months, you can still collect your credits (if you’re eligible), but you must reduce your subsidy by the amount of your QSEHRA allowance.
Your QSEHRA is affordable if you’re not paying more than 9.12% of your actual income in 2023 (8.39% in 2024) for the second-lowest-cost silver plan premium on the Marketplace after you factor in your QSEHRA allowance amount.
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 health coverage option for employers looking to support employees with premium tax credits, which is health stipends.
Healthcare stipends are taxable allowances provided to employees to cover health-related costs, including monthly premium payments and out-of-pocket expenses. Some stipends are offered up-front like a bonus, while others use a reimbursement model, much like an HRA.
Because stipends are taxable non-wage income, employers can offer them 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 sizeable monthly allowance, you could impact your employees' actual tax credit. Because stipends are considered taxable wages, they can cause an increase in actual household income. But, stipends generally work alongside tax credits. Remember that employees will be responsible for paying any federal income tax liability on the stipend amounts they receive.
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 Inflation Reduction Act, more individuals are able to get affordable coverage through a marketplace plan so they can stay safe and healthy.
If you’re an employer whose employees qualify for premium tax credits, you can provide them with a personalized health benefit to help them 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? If so, PeopleKeep can help!
Our personalized benefits administration software lets you easily set up and manage HRAs and employee stipends.
This blog article was originally published on November 17, 2014. It was last updated on November 10, 2023.