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Small Business Employee Benefits and HR Blog

Key Facts About The Medical Insurance Premium Tax Credit

Starting in 2014, individuals and families can take a new medical premium tax credit to help them afford health insurance coverage purchased through a state-based Health Insurance Marketplace. On May 18, 2012, the Treasury Department and the IRS issued final regulations which provide guidance for individuals who enroll in qualified health plans through Exchanges and claim the premium tax credit, and for Exchanges that make qualified health plans available to individuals and employers. 

medical premium tax credit

Medical Insurance Premium Tax Credit FAQs

What are the eligibility requirements?

  • Household income must be between 100% and 400% of the federal poverty level (FPL).

  • Covered individuals must be enrolled in a “qualified health plan” through a Health Insurance Marketplace 

  • Covered individuals must be legally present in the United States and not incarcerated.

  • Covered individuals must not be eligible for other qualifying coverage, such as Medicare, Medicaid, or affordable employer-sponsored insurance.

How much is the tax credit?

The credit amount is generally equal to the difference between the premium for the
benchmark plan and the taxpayer’s expected contribution.

  • The expected contribution is a specified percentage of the taxpayer’s household income. The percentage increases as income increases, from 2% of income for families at 100% of the FPL to 9.5% of income for families at 400% of FPL. 

  • The benchmark plan is the second-lowest-cost plan that would cover the family at the “silver” level of coverage.

Are there any special rules?

Yes - the credit is advanceable (i.e. advance payments are made directly to the insurance company on the family’s behalf). The advance payments are then reconciled against the amount of the family’s actual premium tax credit, as calculated on the family’s federal income tax return.

4 Key Facts About The Medical Premium Tax Credit

Broad Middle-Class Eligibility

The premium tax credit is generally available to individuals and families with incomes between 100% and 400% of the federal poverty level. The Congressional Budget Office estimates that, when the Affordable Care Act is fully phased in, the premium tax credit will help 20 million Americans afford health insurance.

Larger Tax Credits for Older Americans who Face Higher Premiums

The amount of the premium tax credit is tied to the amount of the premium, so that older Americans who face higher premiums will receive a greater credit.

The Tax Credit Controls Health Care Costs by Incentivizing Families to Choose More Cost-Effective Coverage

The amount of the premium tax credit is generally fixed based on a benchmark plan (which may be age adjusted within Affordable Care Act limitations), so families that choose to purchase coverage that is less expensive than the benchmark plan will pay less towards the cost of that coverage.

The Credit Is Refundable So Even Families with Modest Incomes Can Benefit

The premium tax credit is fully refundable, so even moderate-income families who may have little federal income tax liability (but who may pay a higher share of their income towards payroll taxes and other taxes) can receive the full benefit of the credit.

3 Premium Tax Credit Calculation Examples

Example 1: Family of Four with Income of $50,000, Purchases Benchmark Plan

The premium tax credit is generally set based on the benchmark plan. The family’s expected contribution is a percentage of the family’s household income.

  • Income as a Percentage of FPL: 224%

  • Expected Family Contribution: $3,570 

  • Premium for Benchmark Plan: $9,000

  • Premium Tax Credit: $5,430 ($9,000 - $3,570)

  • Premium for Plan Family Chooses: $9,000

  • Actual Family Contribution: $3,570

Example 2: Family of Four with Income of $50,000, Purchases Less Expensive Plan

If a family chooses a plan that is less expensive than the benchmark plan, the family will generally pay less, thereby creating an incentive to choose a less costly plan and reducing overall health care costs. 

  • Income as a Percentage of FPL: 224%

  • Expected Family Contribution: $3,570 

  • Premium for Benchmark Plan: $9,000

  • Premium Tax Credit: $5,430 ($9,000 - $3,570)

  • Premium for Plan Family Chooses: $7,500

  • Actual Family Contribution: $2,070 ($7,500 - $5,430)

Example 3: Family of Four with Income of $50,000, Parents are between the ages of 55 and 64

Because premiums are generally higher for older individuals, the premium tax credit also is higher for these individuals.

  • Income as a Percentage of FPL: 224%

  • Expected Family Contribution: $3,570 

  • Premium for Benchmark Plan: $14,000

  • Premium Tax Credit: $10,430 ($14,000 - $3,570)

  • Premium for Plan Family Chooses: $14,000

  • Actual Family Contribution: $3,570

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