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Paying for Health Insurance

Federal Subsidies May Lower Your Costs
  • Lisa Zamosky
Chapter

Abstract

Under the Affordable Care Act, the federal government will provide financial assistance to millions of middle- and low-income families. Subsidies, or tax credits, will reduce the amount many individuals and families pay for health insurance, and for some, also lower their out-of-pocket costs at the time they seek medical care.

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Under the Affordable Care Act, the federal government will provide financial assistance to millions of middle- and low-income families. Subsidies, or tax credits, will reduce the amount many individuals and families pay for health insurance, and for some, also lower their out-of-pocket costs at the time they seek medical care.

Help Paying for Health Insurance

If there’s one question people ask most frequently about new health insurance plans available under the Affordable Care Act it is: “How much will it cost me?”

There have been endless media reports warning about the potential of health insurance prices skyrocketing. And, there are reasons why prices may, in fact, increase.

First, the plans sold through the health insurance marketplaces will include more benefits than are in the plans most people buying their own coverage have today. Mental health services and maternity care, for example, must now be included as covered services in every new health plan.

Another reason for a possible hike in insurance rates is the new requirement that insurers accept everyone who applies for a health plan. That means people with higher health costs can no longer be denied insurance, and they can’t be charged more for their coverage than healthy people. This may contribute to the rise in the average cost of health insurance premiums. It’s possible that some people will see their insurance rates increase as the burden of cost is spread more evenly across healthy and the sick, older, and younger policy holders.

Whether or not costs rise may also depend on where you live. Some states had stricter guidelines in place for insurers before the Affordable Care Act became law. States that allowed bare-bones insurance plans to be sold, and that didn’t require insurers to comply with stringent laws, may see prices rise as health plans make changes to comply with the new law. However, it should be said that health plan rates released by a handful of states by July 2013 have not shown any great spikes in prices.

However, even if there are cases where premiums do increase, most people buying insurance through the state-based online health insurance marketplaces are likely to pay less for their coverage. That’s because under the new law, the federal government makes insurance premiums more affordable for low- and middle-income Americans by providing financial assistance in the form of tax credits to help pay for coverage. In fact, 26 million people—nearly 90% of those eligible to buy insurance on the new marketplaces—are expected to qualify for federal payments to help lower their health insurance costs in 2014.1

One study conducted by the consulting firm Milliman found that families in the state of California earning less than $60,000 a year could save as much as 84% on their premiums and 76% on the total cost of their healthcare with the help of federal subsidies.2

Do You Qualify for Tax Credits?

Let’s get down to business. Do you and your family qualify for the tax credits that will lower the cost of health insurance for millions of Americans? If you do qualify, how do the credits work and how will you go about taking yours?

First, let’s look at a few things that will determine whether or not you qualify.

Your Income

Your modified gross income (called MAGI) is what the marketplace will use to determine whether you are eligible for tax credits. For most taxpayers, MAGI is the same as adjusted gross income, or AGI. You can easily find your AGI on your last tax form. Here’s where to look:
  • If you use Form 1040 EZ – Line 4

  • If you use Form 1040A – Line 22

  • If you use Form 1040 – Line 37

If you’re an individual with an annual income of less than roughly $46,000, or your family of four earns no more than about $94,000 a year, you meet the income requirements to qualify for a tax credit.

The amount of help you’ll get depends on your family income and your family size. Lower-income families get the most help.

Take a look at Table 3-1. If your income is near the amounts shown, you may qualify for a tax credit to reduce the cost of your health insurance.
Table 3-1.

Family Size and Income Qualifying for a Tax Credit

Family Size

Yearly Income

1

$45,960

2

$62,040

3

$78,120

4

$94,200

5

$110,280

6

$126,360

The law limits the amount you’ll contribute to your premium for a silver-level insurance plan to a set percentage of your income. Table 3-2 shows how that breaks down.
Table 3-2.

Income Table3

Family Size = 1

If your income is

Less than

$15,280

More than

$15,280

but less than

$17,240

More than

$17,240

but less than

$ 22,980

More than

$22,980

but less than

$ 28,730

More than

$28,730

but less than

$ 34,470

More than

$34,470

but less than

$ 45,960

More than

$ 45,960

Expected Family Contribution as a percent of income is

2.0%

3.0%

4.0%

6.3%

8.1%

9.5%

You pay full amount of premium.

Family Size = 2

If your income is

Less than

$ 20,630

More than

$20,630

but less than

$23,270

More than

$23,270

but less than

$ 31,020

More than

$31,020

but less than

$ 38,780

More than

$38,780

but less than

$ 46,530

More than

$46,530

but less than

$ 62,040

More than

$ 62,040

Expected Family Contribution as a percent of income is

2.0%

3.0%

4.0%

6.3%

8.1%

9.5%

You pay full amount of premium.

Family Size = 3

If your income is

Less than

$ 25,970

More than

$25,970

but less than

$ 29,300

More than

$29,300

but less than

$ 39,060

More than

$39,060

but less than

$ 48,830

More than

$48,830

but less than

$ 58,590

More than

$58,590

but less than

$ 78,120

More than

$ 78,120

Expected Family Contribution as a percent of income is

2.0%

3.0%

4.0%

6.3%

8.1%

9.5%

You pay full amount of premium.

Family Size = 4

If your income is

Less than

$ 31,320

More than

$31,320

but less than

$ 35,330

More than

$35,330

but less than

$ 47,100

More than

$47,100

but less than

$ 58,880

More than

$58,880

but less than

$ 70,650

More than

$70,650

but less than

$ 94,200

More than

$ 94,200

Expected Family Contribution as a percent of income is

2.0%

3.0%

4.0%

6.3%

8.1%

9.5%

You pay full amount of premium.

Family Size = 5

If your income is

Less than

$ 36,670

More than

$36,670

but less than

$ 41,360

More than

$41,360

but less than

$ 55,140

More than

$55,140

but less than

$ 68,930

More than

$68,930

but less than

$ 82,710

More than

$82,710

but less than

$ 110,280

More than

$ 110,280

Expected Family Contribution as a percent of income is

2.0%

3.0%

4.0%

6.3%

8.1%

9.5%

You pay full amount of premium.

According to the government, “Larger families [more than 5 members] may qualify for larger tax credits.”

Again, the amount of the subsidy you’ll receive is based on the cost of the premium for the second lowest-cost “silver” health plan available through your state’s marketplace. (See  Chapter 2 for more on this.) A silver plan will generally cover 70% of your medical costs, leaving the remaining 30% for you to pay.4

Although the size of your subsidy is calculated assuming you are buying a silver plan, you can choose to buy any of the other three types of health plans—a bronze plan, which will cover just 60% of your medical costs; a gold plan, which will on average pay for 80% of your costs; or a platinum plan, which will cover 90% of your medical costs.

If you choose to buy a pricier health plan—gold or platinum—you’ll be required to pay the difference between the credit you receive to help pay for your plan’s premium and the cost of the more expensive plan. You can also choose to buy a less expensive plan, which will lower your premiums even further but offer less coverage for your medical care.5

In addition, some people will qualify for a price break on their out-of-pocket spending limits, such as deductibles, co-pays, and co-insurance.

To be eligible, your income must be less than roughly two and half times the poverty level, which is about $28,000 for an individual or about $58,000 for a family of four. However, you can take advantage of the subsidies to lower your out-of-pocket costs only when you buy a silver-level plan.6

Cost Alert

Although premium tax subsidies can be applied to any of the “metal level” plans (bronze, silver, gold, platinum) sold through your state’s marketplace, if you qualify, you can only take advantage of subsidies that lower your out-of-pocket costs (the amount you spend when you receive medical care) if you buy a silver-level plan.

Tables 3-3 and 3-4 shows out-of-pocket spending limits based on income for both individuals and families:
Table 3-3.

Out-of-Pocket Spending Limits for an Individual7

Annual Income

Out-of-Pocket Costs by Percentage of Income

Percentage of Costs Covered by the Health Plan

Individuals

  

$11,490––$15,282

2

94

$15,282–$17,235

3–4

94

$17,325–$22,980

4–6.3

87

$22,980–$28,725

6.3–8.1

73

$28,725–$34,470

8.1–9.5

70

$34,470–$40,215

9.5

70

$40,215–$45,960

9.5

70

Table 3-4.

Out-of-Pocket Spending Limits for a Family of Four8

Annual Income

Out-of-Pocket Costs by Percentage of Income

Percentage of Costs Covered by the Health Plan

Families of Four

  

$23,550–$31,322

2

94

$31,322–$35,325

3–4

94

$35,325–$47,100

4–6.3

87

$47,100–$58,875

6.3–8.1

73

$58,875–$70,650

8.1–9.5

70

$70,650–$82,425

9.5

70

$82,425–$94,200

9.5

70

To understand the impact the subsidies can have on the cost of health insurance, let’s take a look at individuals and families in five different scenarios and at how the tax credits will work when they buy insurance through their state’s marketplace.

As I’ll explain in detail later in this chapter, there are several ways to take the tax credits for which you’re eligible. One option is to have the federal subsidies sent directly to your health plan so that you pay less each month for your policy.

Keep in mind the following are ballpark figures constructed with the use of the subsidy calculator available at the Kaiser Family Foundation’s website ( kff.org ). To get firm prices for your insurance coverage, you will need to check with your state’s marketplace.

Case Study 1

Name: John Richards

Age: 27

Marital status: Single, no children

Insurance type: Individual coverage

Annual income: $31,200 per year

John’s annual income

$31,200

The cost of health insurance without subsidies (annual cost)

$3,163

The subsidy John qualifies for

$456

John’s cost for coverage after the subsidies are applied

$2,706 per year ($226 per month)

John’s premium has been reduced by 14% for a silver-level health plan as a result of the tax credit.

If he chose to save even more money on his insurance premium, he could choose a bronze plan, priced at $2,165 a year or roughly $180 per month.

In addition, because John is younger than age 30, he can opt for a catastrophic health plan if one is sold through his state’s marketplace. Again, these plans offer lower premiums but for considerably less coverage. In addition, individuals purchasing catastrophic plans are not eligible for premium tax credits. So, if John chooses this option, he will not get help from the federal government to lower either his premium or out-of-pocket costs.9

Case Study 2

Name: Beth Stone

Age: 44

Marital status: Single, two children younger than age 18

Insurance type: Family coverage

Annual income: $25,000 per year. If Beth and her two kids live in a state expanding Medicaid, she would qualify for the program. And because of Beth’s income and the fact that her children are both younger than age 19, they would likely qualify for Medicaid or the Children’s Health Insurance Program (CHIP). The CHIP program provides health coverage to children living in families with incomes too high to qualify for Medicaid, but that are unable to afford private health insurance.

If, however, Beth lives in a state not expanding its Medicaid program, here’s how her insurance costs would be affected by the tax credits if she sought to buy coverage through her state’s marketplace:

Beth’s annual income

$25,000

The cost of health insurance without subsidies (annual cost)

$8,049

The subsidy Beth qualifies for

$7,549

Beth’s cost for coverage after the subsidies are applied

$500 per year ($42 per month)

In Beth’s case, the government is covering 94% of the cost of her health insurance premium for a silver-level health plan.

She could bring her premium down to $0 per month by choosing to purchase a bronze plan instead.

In addition, Beth’s income qualifies her for a break on out-of-pocket costs—the ­co-pays, co-insurance, and deductibles she must pay when she seeks medical care.

For a silver-level plan, which typically covers 70% of medical costs, Beth will instead receive coverage at about 94%, leaving her to pay the remaining 6% of costs when she goes to the doctor instead of 30%.

It should be noted, however, that if Beth chooses a bronze-level plan, she will not receive a break on out-of-pocket costs (the price break only applies to the premium). Those deductions only apply if she buys the silver plan.10

Case Study 3

Name: The Gonzalez Family

Age: Two adults, ages 38 and 36, and two children younger than age 18

Marital status: Married, two children

Insurance type: Family coverage

Annual income: $55,600 per year

The Gonzalez’s annual income

$55,600

The cost of health insurance without subsidies (annual cost)

$11,306

The subsidy the Gonzalez family qualifies for

$7,101

The Gonzalez’s cost for coverage after subsidies are applied

$4,205 per year ($350 per month)

This represents a price reduction of 63% for a silver-level health plan.

If the family chooses instead to buy a bronze plan, they would lower their premium to $2,270, or about $189 per month.

In addition, the family’s total income qualifies them for reduced out-of-pocket costs, which again, they can take advantage of only if they sign onto a silver-level plan.11

Case Study 4

Name: Judy and Rich Swanson

Age: 60 and 62

Marital status: Married, no children

Insurance type: Family coverage

Annual income: $31,000 per year

The Swanson’s annual income

$31,000

The cost of health insurance without subsidies (annual cost)

$16,862

The subsidy the Swansons qualify for

$14,911

The Swansons cost for coverage after subsidies are applied

$1,951 per year ($163 per month)

This represents a price reduction of 88% for a silver-level health plan.

This couple could pay nothing on a monthly basis for health insurance if instead of a silver plan they bought a bronze-level plan.

However, the silver plan might be a better deal for this couple despite its higher monthly premium because their income entitles them to a subsidy to lower their out-of-pocket costs. Instead of a plan covering 70%, they would qualify for benefits that pay for 87% of their medical costs.12

Case Study 5

Name: The Bronsons

Age: 42 and 48

Marital status: Married, one child younger than the age of 18

Insurance type: Family coverage

Annual income: $110,000 per year

The Bronson’s annual income

$110,000

The cost of health insurance without subsidies (annual cost)

$10,850

The subsidy the Bronsons qualify for

$0

The Bronsons cost for coverage after subsidies are applied

$10,850 per year ($904 per month)

This family’s annual income is too high for them to qualify for a tax credit. This family would therefore be responsible for the full cost of their health insurance.

The Bronsons could, however, lower their cost by opting for a bronze-level health plan. The premium would drop by $1,857 a year (or by about $155 per month) to $8,993.13

Resource Alert

You can learn how your health insurance premiums and out-of-pocket costs will be affected by using the Health Reform Calculator at the Kaiser Family Foundation’s website: http://kff.org/interactive/subsidy-calculator/ . You can also check on your state’s health insurance marketplace. You can find your state’s marketplace at Healthcare.gov .

No Other Offers of Coverage

In most cases, you won’t qualify for a tax credit if your employer offers health insurance, even if you meet income requirements. However, the health plan offered by your employer does have to meet certain requirements:
  • The premium cannot cost more than 9.5% of your annual income.

  • Your employer’s plan must pay for at least 60% of the cost of covered benefits.14

Cost Alert! If your work-based insurance covers your spouse and/or children, take note! The rules apply only to the cost of health insurance provided to the employee. If the plan costs less than 9.5% of the worker’s income, family members will be able to buy insurance through the marketplace, but will not be eligible for subsidized coverage.

Where You Shop Matters

To take advantage of the price break you’ll get from available tax credits, you must buy health insurance through your state’s marketplace. You can start shopping October 1, 2013 for a health plan that will take effect January 1, 2014.

How to Take Your Tax Credit

We’ve talked a lot about the tax credits available under the law, and the various ways in which your costs may be reduced if you qualify. But how does the tax credit get applied? What do you have to do in order to take advantage of any savings to which you’re entitled?

You have choices about how you take your tax credit: You can take it now, which will lower the amount of your monthly health insurance premium. In this case, the government will send the tax credit directly to your health plan. You can also pay the full premium during the year and take your credit at tax time. It’s your choice.

The worksheet in Figure 3-1 shows you the impact of taking your tax credit now versus taking it when you file your tax return.
Figure 3-1.

Two different ways to take your tax credit. Source: Consumers Union.

There is, actually, one more alternative for taking your tax credit, and that is by taking a partial credit. For example, if you qualify for a credit that reduces your insurance premium by $200 per month, you can instead reduce your premium by $100 per month and claim the rest at tax time. Your monthly premiums will still be lower, just not by as much.

Because the tax credits are based on your income, changes that take place during the year because of a job loss, a change in your family situation, or an increase in salary can impact how much you’ll owe in taxes at year’s end. By taking some now and the rest at tax time, there is less chance of the need for repayment.

Reporting Changes

When changes to your income occur, you’ll want to report them to your state’s health insurance marketplace. Some of the changes to report are:

Changes in Family Size
  • You get married or divorced.

  • You have a baby.

  • You no longer claim your child on your tax return.

Income Changes
  • You get a raise.

  • You lose your job.

  • You take a salary cut.

An Offer of Health Insurance
  • You’re offered health insurance through a job.

Where to Get Help

All of this can be confusing. For information that pertains to your unique situation, keep these resources in mind:
  • For details on whether you qualify and how much credit you will get, contact your state’s health insurance marketplace at Healthcare.gov .

  • At tax time, talk to your tax preparer or find free tax preparation help at irs.treasury.gov/freetaxprep , or call 1-800-906-9887.

Summary

The Affordable Care Act makes financial assistance available to millions of Americans with the goal of making health insurance more affordable. It’s important to understand the new benefits available and how to take advantage of them so you don’t miss out on an opportunity to gain access to benefits at a reduced cost.

In the next chapter we’ll walk through the new benefits and rules the law puts in place for American businesses.

Footnotes

  1. 1.

    Families USA. Help Is at Hand: New Health Insurance Tax Credits for Americans: http://familiesusa2.org/assets/pdfs/premium-tax-credits/National-Report.pdf

  2. 2.

    Milliman. Factors Affecting Individual Premium Rates in 2014 for California: www.healthexchange.ca.gov/Documents/Factors%20Affecting%20Individual%20Premiums%20FINAL%203-28-2013.pdf

  3. 3.
  4. 4.
  5. 5.

    Ibid.

  6. 6.

    Ibid.

  7. 7.

    Center on Budget and Policy Priorities: Making Health Care More Affordable: The New Premium and Cost-Sharing Assistance: www.cbpp.org/cms/index.cfm?fa=view&id=3190

  8. 8.

    Ibid.

  9. 9.

    Kaiser Family Foundation Health Insurance Subsidy Calculator.

  10. 10.

    Kaiser Family Foundation Health Insurance Subsidy Calculator.

  11. 11.

    Kaiser Family Foundation Health Insurance Subsidy Calculator.

  12. 12.

    Kaiser Family Foundation Health Insurance Subsidy Calculator.

  13. 13.

    Kaiser Family Foundation Health Insurance Subsidy Calculator.

  14. 14.

    Kaiser Family Foundation. Focus on Health Reform: http://kaiserfamilyfoundation.files.wordpress.com/2011/04/8061-021.pdf

Copyright information

© Lisa Zamosky 2013

Authors and Affiliations

  • Lisa Zamosky
    • 1
  1. 1.CaliforniaUSA

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