Health Care Premium Tax Credits-money for health care

Authored by John Moran, CPA, cpacaregivercentral.blogspot.com, 720.635.3180

Tax  Credits – Reducing your Health insurance with tax incentives

Tax credits are not new having been a part of tax law for 50 years or more.   A tax credit is a dollar for dollar reduction of your tax liability (as opposed to a tax deduction which reduces your income in arriving at taxable income, the amount upon which the tax rate is applied and tax computed).  Using tax credits to pay for health insurance is new, and has not been part of any earlier tax law.

Fast forward – Year 2014 (but take action now by visiting the Marketplace Health care exchange)…

The health care insurance marketplace (the “Exchange”) includes a new feature – using income tax rules to pay part of your monthly insurance premiums.  Therefore, the insurance company premiums posted to the exchange are merely the starting point in computing your true cost.  Income tax credits (which differ significantly from income tax deductions) can now be used to reduce the posted insurance premium cost.  

Let’s go through an example:

Peter, Mary and their two children have an annual income of $52,988 which translates to approximately 2.25 times the federal poverty line income level.  At this income level, the family is expected to contribute 7.18 %  of their income to the cost of health care insurance, or $3,802. Let’s further assume the premiums for health care for a benchmark (I’ll define benchmark later) family plan are $15,000.  Peter and Mary are entitled to an $11,198 premium tax credit.  The premium tax credit is the difference between $15,000 total family cost and $3,802, their expected contribution.

Current tax law will allow Peter & Mary to request an advance on their premium tax credit and send the tax credit to the insurance company thereby reducing their monthly cash outlay for health insurance. Alternatively, Peter & Mary can pay the regular premium due each month and claim the credit on their individual tax return filed for each year.  Either way will be allowed.

Bronze, Silver, Gold, and Platinum Insurance plans

Health care exchange coverage and related premium cost will have four levels. At the lowest exchange coverage level, bronze, the insurance company will pay 60 percent of your medical costs.  At the highest exchange coverage level, platinum, the insurance company will pay 90 percent of your medical costs. Understanding the coverage levels is key to understanding the change imposed on the health insurance market.  It is not possible to self-insure or avoid insurance for small dollar health care costs. Instead an insurance provider will be involved in some form of reimbursement for every dollar of health care cost incurred.  Most home insurance, vehicle insurance, and other personal insurance creates certain deductibles thereby avoiding “trading dollars” with an insurance company and incurring unnecessary administrative costs of processing claims.  The Affordable Care Act contains no provisions for initial deductibles, and potentially burdens the claims handling process with extra costs.  The extra costs, in turn, must be reflected in the premiums charged by the insurance companies.

Benchmark plan

A benchmark plan is the second lowest silver plan available to each member of a tax household. Please note it is possible not all family members in a tax household reside in the same geographic location. Students in college are members of one tax household even though they may reside most of the year in a distant city (out of state student, for example).  The cost of a silver plan for the student would be added to the parent’s plan in arriving at the tax household benchmark plan cost.

Medicare

Medicare coverage is not affected by the premium tax credits, nor by most provisions of the Affordable Care Act (“Obamacare”).   There are some rulemaking changes, most notably in the reduction of the Part D drug plan donut hole (a topic for another article), and increased accountability by Medicare Advantage plan providers to make sure the premiums they receive are used, in fact, for medical care.

Employer plan participants

The health care insurance premium tax credits do not apply, for the most part, to those who work for employers with 50 or more employees.  These large companies typically have plans available which cover 60 % of the cost of medical care.  Employees who are charged more than 8 % of their household income for medical plan benefits can opt out of their employer plan, purchase a policy on the exchange, and then use premium tax credits. The premium tax credits are available until household income exceeds 4 times the federal poverty level.  The year 2013 federal poverty levels are approx. $11,500 for a one person household, and $23,500 for a four person household.

In Colorado the Connect for Health.org web site is http://connectforhealthco.com http://connectforhealthco.com/

Health Insurance Exchanges and Tax Credits (IRS meets Health Care Reform)

Tax credits estimated under Health Care Exchanges

http://kff.org/health-reform/issue-brief/quantifying-tax-credits-for-people-now-buying-insurance-on-their-own/

The Henry J Kaiser Family Foundation published an issue brief estimating the national insurance premium "tax credit". The tax credit subsidizes your health care insurance purchases on state Health Care Exchanges. Read on ......

Employers – Pay or Play, Affordable Health Care Act

See www.moranlong.com for additional information on health care and tax law integration.

What are employers likely to do, after the recent Department of Health and Human Services moratorium on enactment to Year 2015? Will they pay the penalty ($2,000 per employee not covered) and not have a tax deduction, or will they play and pay 2 to 3 times the penalty in health coverage for their employees?

Prior to the recent moratorium on enforcement, the benefits consultant Mercer Inc. conducted a survey and found that six percent of firms offering health coverage planned to cease coverage. In July, 2012, the Congressional Budget Office (“CBO”) estimated 2.5 percent of workers who are counting on their employer to offer coverage might lose the benefit by the end of the next decade. A Gallup poll found that 44.6 percent of Americans get their health insurance from an employer in 2011, a rate that has declined for more than a decade. The CBO projects, on balance, the law’s reforms will expand coverage to about half of the 58 million people who don’t have insurance today.

Currently, many employers are wise to hesitate at dropping health coverage as health coverage is a recruiting advantage for prospective employees, and a retention factor in the minds of current employees. 

Beginning in 2014, there is a tax of $63 per person covered (including all dependents under the employer plan, not just employees).  This tax is estimated to raise $25 billion fund to to cover people with high medical bills. The University of Notre Dame will pay more than $500,000 for the 5,000 employees and 7,000 dependents under its plan.   This new cost will be factored into tuition costs for future students.