PPACA: Health Insurance Tax Credits


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To help make qualified health plans (QHPs) that are available through Exchanges more affordable, certain individuals and businesses may be eligible for federal financial assistance. Better known as premium credits, this cost sharing support is also slated to encourage eligible persons to purchase insurance.

What are Premium Credits?

Simply put, premium credits are advanceable and refundable federal tax credits that are used to pay for health insurance purchased through a state or federally-run health Exchange. The credits for individuals and their families will be available starting in 2014.

How to Qualify for Premium Credits

Individuals may qualify for premium credits by meeting the following criteria:

  1. File Income Taxes – While premium credits can be distributed directly to the insurer in advance, they must be reconciled through one’s individual tax returns. Married persons must file a tax return to receive the credit. Individuals who have little or no tax liability may be eligible for premium credits. 
  1. Enroll in an Exchange Plan – persons who are residing in a state with an established exchange and are not incarcerated or undocumented aliens may be eligible. 
  1. Not Eligible for Other Acceptable Coverage - premium credits will be available for individuals who do not qualify for minimum essential coverage available through Medicare, Medicaid, Children’s Health Insurance Programs (CHIP), coverage related to military service, or an employer-sponsored plan. Some individuals who are eligible for employer-sponsored coverage may be eligible for premium credits if the self-only coverage costs them more than 9.5% of their household income or covers less than 60% of total allowed costs. 
  1. Employer Does Not Contribute Toward Exchange Plan – individuals enrolled in QHPs offered through the Exchange that their employers contribute towards will not be  eligible for premium credits. 
  1. Income Less Than 400% of the Federal Poverty Level (FPL) – individuals must earn between 100% and 400% FPL to be eligible for a premium credit. Those whose income is close to the 400% FPL may or may not receive a premium credit.

 The following table illustrates the estimated percentage of their income individuals may pay for coverage depending on their FPL: 

Federal Poverty Level (FPL)

Cost-Sharing Range

0% to 133%

≥ 2% of income

133.01% to 300%

3% to 9.5% of income

300% to 400%

≤ 9.5%

400%  and higher

Not eligible for premium credits


The following table illustrates the FPL for 2012:

FPL 2012
Image source: http://aspe.hhs.gov/poverty/12poverty.shtml

The specific process through which individuals will be screened for eligibility will likely be specified by the Department of Health and Human Services in the near future. 

Calculation of Premium Credit Amounts
The following illustration shows how premium credit amounts will be calculated: 

Premium Tax Credit Calculation

Image Source: CRS Health Insurance Premium Credits in the Patient Protection and Affordable CareAct.

To use the Kaiser Foundation’s premium subsidy calculator, click here »  

In addition to premium tax credits for individuals to use within the Exchange, small businesses also have an opportunity to recoup the expense of funding health insurance for its employees. 

Small Business Tax Credit
A small business may be eligible to receive a tax credit if it pays at least 50% of the self-only health insurance premiums (i.e. a qualifying arrangement) and has 25 or fewer full time employees that each earn less than $50,000 a year. The credit, which was first available for the 2010 tax year, is designed to help low to moderate-income workers obtain health insurance through an employer (offering coverage for the first time or paying for existing coverage). 

Only payments made through a qualifying arrangement, i.e. a uniform percentage paid towards the employee premium, are eligible for the tax credit. For the purpose of this credit, Health Reimbursement Accounts (HRAs) and Health Flexible Spending Accounts (FSAs), and Health Savings Accounts are not considered qualifying arrangements. 

Eligible businesses include taxable employers and employers that are organizations described in § 501(c) and exempt from tax under § 501(a) (tax-exempt employers). A sliding scale determines the eligible credit amount for a business.

The following individuals are not eligible for the small business tax credit: 

  • Sole proprietors
  • Partners in a partnership
  • Shareholders owning more than 2%  in an S corporation
  • Owners of more than 5% of other businesses
  • Family members of the above individuals are, also, not eligible 

To learn more about the small business health care tax credit, click here »

For FAQs about calculating the tax credit, click here »

To watch a video about the small business tax credit, click here »

While the IRS has been forthcoming with information about the small business health care tax credit, many small businesses have shied away from applying for it. Why? It can take several hours and or professional tax assistance to determine eligibility. 

Conclusion
PPACA has provided two avenues through which individuals and small businesses may receive financial support to foster the purchasing of health insurance. While the premium tax credit for individuals will become available in 2014, the credit opportunity for small businesses became available for the 2010 tax year. Additional clarification and support is needed to help determine which individuals are eligible for the tax credits initially and in the long term. 

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Sources

CRS: Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA)

Department of Treasury: Health Insurance Premium Tax Credit

IRS: Affordable Care Act Tax Provisions

IRS: Small Business Health Care Tax Credit for Small Employers

IRS: Section 45R – Tax Credit for Employee Health Insurance Expenses of Small Employers. Notice 2010-82

Kaiser Family Foundation: Health Reform Subsidy Calculator

NCSL: Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (PPACA)

 

This overview is for general information purposes only and should not be taken as actual tax or formal legal advice.  Please consult with a lawyer or tax professional for guidance.