How Health Care Reform Helps People and Small Businesses Pay for Coverage

Buying health insurance can be a costly endeavor. Good coverage isn’t cheap, and that was true even before the Affordable Care Act.

But now, because of health care reform’s individual mandate, not buying coverage isn’t an option. Most Americans must have health insurance or face a tax penalty.

So what of the thousands who can’t afford to pay full price? Depending on family size and income, many qualify to receive help to offset the cost of coverage. That help comes in two forms: premium tax credits and cost-sharing subsidies.

Why should you care? Somebody working for you right now might be eligible.

Who’s in, who’s out

To be eligible for a premium tax credit, citizens and legal residents must satisfy the following criteria:

  • Have household income between 100-400 percent of the federal poverty line (FPL); for 2014 subsidies, the FPL for employees living in all states except Hawaii and Alaska is $11,490 for an individual and $23,550 for a family of four
  • Purchase coverage through a state or federal health insurance marketplace

There are a few caveats, of course.

First, those who are eligible for coverage through a governmental program such as Medicaid, Medicare and the Children’s Health Insurance Program cannot receive subsidies.

Second, subsidies aren’t available to those who are offered qualifying coverage through their employer that meets minimum value and affordability requirements:

  • Minimum value – At least 60 percent of essential health benefits costs covered by the plan
  • Affordable – Employee’s share of premium for the lowest-cost, employee-only plan option is not to exceed 9.5 percent of their household income

And finally, you’re not eligible if you file a “Married Filing Separately” tax return, or if you are claimed as a dependent by another person.

Calculating the credit

The tax credit is calculated using a sliding scale – the bigger the income, the smaller the credit.

The size of the tax credit is based generally on geographic area and the premium for the second-lowest cost silver plan in the health insurance marketplace. (A silver plan covers, on average, 70 percent of the cost of essential health benefits provided under the plan.)

Additionally, an individual or family who qualifies for a tax credit doesn’t have to pay premium costs beyond a certain percentage of their income.

Here’s what those premium caps look like:

Income level Premium as a percentage of income
Up to 133% FPL 2% of income
133-150% FPL 3-4% of income
150-200% FPL 4-6.3% of income
200-250% FPL 6.3-8.05% of income
250-300 FPL 8.05-9.5% of income
300-400% FPL 9.5% of income


A real-world example

Let’s say a family of four – two nonsmoking parents and two kids – earns $3,925 a month or $47,100 a year (200 percent of FPL). Their unsubsidized premium is $690.83 a month based on the U.S. average cost of a silver-level marketplace plan.

Because they’re required to put no more than 6.3 percent of their income ($247.28) toward their premium, their tax credit would be $443.55 ($690.83 – $247.28).

Those eligible for the credit can get it one of two ways: They can (1) choose to have the government pay it in advance to their insurance company to lower monthly premium payments or (2) get it all when filing their tax return.

If an individual or family’s income changes during the year, they can check back with the marketplace to have the credit recalculated. A true-up will occur each year when their federal income tax return is filed, and any overpayment will have to be repaid, so it’s better to be safe than sorry.

Additional cost-sharing assistance

So we’ve got premiums under control, but what about deductibles, copayments and other out-of-pocket costs?

Cost-sharing subsidies help individuals and families reduce out-of-pocket medical expenses by raising the actuarial value of the aforementioned silver-level plan from 70 percent to as high as 94 percent. This means that the insurance carrier will pay an even greater share of the cost of essential health benefits covered under the plan.

To qualify, you must have an income of 100-250 percent of FPL and purchase a silver-level plan through a health insurance marketplace. The following expenses are lowered for qualified individuals:

  • Deductibles
  • Copayments
  • Coinsurance
  • Out-of-pocket maximums

Small businesses can also catch a break

Individuals and families aren’t the only ones who can get tax credits to offset health insurance premium costs. There’s also the Small Business Health Care Tax Credit.

Requirements for the credit include:

  • Employing no more than 25 full-time employees, including full-time equivalent employees
  • Paying an average annual wage of $50,000 ($50,800 for 2014) or less
  • Contributing at least 50 percent of the cost of employee-only coverage
  • Offering a qualified health plan obtained through a Small Business Health Options Program Marketplace (beginning in 2014)

Some organizations may also be able to claim this tax credit for previous years. And it can add up fast.

According to the IRS, the maximum credit for tax years beginning in 2014 is 50 percent of premiums paid for small businesses and 35 percent of premiums paid for small tax-exempt businesses.

And when it comes to the cost of doing business, every little bit helps.

Learn how Insperity can help your company handle health care reform issues of all kinds.

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