Charts and graphs are helpful tools, but often they’re not enough to fully understand the complexities of health care and medical insurance. When it comes to the premium tax credit that many small-business employees are eligible for, they need all available details — and straightforward explanations — about:
- How the premium tax credit works
- Who is eligible
- How to apply for it
- The role of their employers
How the Premium Tax Credit Works
Through the Affordable Care Act, also known as Obamacare, the federal government provides premium tax credits, or health insurance discounts, to eligible individuals and families. It’s an attractive incentive to purchase health coverage through the state Health Insurance Marketplaces.
Why is it attractive? Most notably, it offers significant cost savings to those who participate. For many, it’s thousands of dollars help pay for vital insurance coverage.
Also, the credits are advanced payable, so they can be used to defray the cost of premiums.
Who is Eligible
Eligibility for the premium tax credit is multifaceted, but in short, people qualify if they meet certain household income requirements and do not have access to affordable health insurance through an employer or government program (such as Medicaid, Medicare or CHIP). Many small-business employees qualify.
Premium tax credit requirements include a household annual income that is within 100 percent to 400 percent of the federal poverty line for the size of the family. The line is adjusted annually for inflation and the number of people in the household.
For example, a household of four that earns $24,250 (100 percent of the poverty line) receives a bigger tax credit than a family of four that earns $97,000 (400 percent).
Other requirements include that the employee:
- Purchases coverage through the state or federal exchange
- Does not receive coverage through a federal program
- Does not file as “married filing separately” on tax forms
- Cannot be claimed as a dependent by someone else
How to Receive and Manage the Premium Tax Credit
When an individual uses the Marketplace to sign up for health care coverage, the online tool can estimate the amount of the premium tax credit that a person can claim for year.
Once a person receives his or her estimated tax credit number from the Marketplace, that person can choose to have all, some, or none of his or her estimated credit paid to the insurance company in advance, which is a major boon that lowers the person’s monthly premiums.
Regardless of the option chosen, anyone who utilizes the premium tax credit must be keenly aware of tax requirements:
- Those who sign up for advance credit payments must file a tax return with all necessary supporting documents.
- Those who choose to receive the premium tax credit in a lump sum after the calendar year should claim the full allowed benefit to maximize the size of the refund or lower the overall amount of taxes owed.
Important forms to remember include:
- 1095-A (Health Insurance Marketplace Statement)
- Form 8962 (Premium Tax Credit) to be filed with Form 1040, 1040A or 1040NR
Additional questions are answered in the IRS’ Pub 974.
The Role of Employers
Small businesses that don’t offer group health insurance can use the presence of the premium tax credit to help their employees in an innovative way. If an employee selects an individual health plan via the Health Insurance Marketplace, he or she may qualify for the tax credit. In addition, the employer can set up a defined contribution health plan, allowing for company-provided reimbursements on health expenses.
Regardless of whether your small business chooses to begin offering healthcare reimbursements, it is a valuable service to at least give your staff clear, easy-to-navigate information about the ins and outs of the premium tax credit.
Within the framework of the Affordable Care Act, small-businesses and their employees can work together to keep health care premiums as low as possible by understanding premium tax credit eligibility in 2016.
If you a have question about the premium tax credit or defined contribution health plans work, please leave a comment below.