By John Moran, CPA, Moran & Long CPAs, 5990 Greenwood Plaza Blvd, Ste 330, Greenwood Village, Colorado 80111, www.moranlong.com, 720-635-3180. No charge for the initial consultation.
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.
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 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.