TREASURY LAYS THE FOUNDATION TO DELIVER TAX CREDITS TO HELP MAKE HEALTH INSURANCE AFFORDABLE FOR MIDDLE-CLASS AMERICANS
We are well on the way to implementing health reform and establishing Affordable Insurance Exchanges – one-stop marketplaces where consumers can choose a private health insurance plan that fits their health needs and have the same kind of insurance choices as members of Congress. Today, the Treasury Department issued proposed regulations implementing the premium tax credit that gives middle-class Americans unprecedented tax benefits to make it easier for them to purchase affordable health insurance.
The Premium Tax Credit:
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Key Facts about the 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 ($22,350 – $89,400 for a family of four in 2011), providing a crucial safety net for the middle class. 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.
- 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.
- 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.
- Credit Is Advanceable to Help Families with Limited Cash-Flow. Since many moderate-income families may not have sufficient cash on hand to pay the full premium upfront, an advance payment of the premium tax credit will be made by the Department of the Treasury directly to the insurance company. This advance payment will assist families to purchase the health insurance they need. Later, the advance payment will be reconciled against the amount of the family’s actual premium tax credit, as calculated on the family’s federal income tax return.
How the Premium Tax Credit Works Eligibility
Credit Amount
Special Rules
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Covered individuals must not be eligible for other qualifying coverage, such as Medicare, Medicaid, or affordable employer-sponsored coverage.
Premium Tax Credit Calculation: Three 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.
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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.
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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.
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