Premium tax credits—the biggest secret in health insurance

Premium tax credits—the biggest secret in health insurance

If you’re like most Americans, you’re probably not familiar with the new health insurance premium tax credits. These tax credits reduce the cost of your health insurance dollar-for-dollar. Here's how it works. If you qualify for a premium tax credit of $1,000 per month and you pick a plan with a $1,250 monthly premium, you would only need to pay $250. That’s some serious savings.

Let me put this in perspective. In 2019, just over 8.5 million Americans received more than $52 billion in premium tax credits. That equates to an average of more than $6,000 per year per person. For a family of four, that’s $24,000 per year.[1] 

How would you feel if the government gave you $24,000 to spend on a private health insurance plan that you choose? How might your employer feel about it?

What most people don’t realize is that many working Americans already qualify for these tax credits. And the Biden administration recently expanded them.

How the premium tax credit works

You can only get the premium tax credit if you buy coverage through your state’s health insurance Marketplace. (At LegUp Health, we refer to this as buying an “on-marketplace” plan). If you buy coverage outside of the Marketplace (i.e. you buy an “off-marketplace” plan), it disqualifies you from the tax credit. (Yes, you can still buy health insurance through other sources, but the only way to get a premium tax credit is through the Marketplace.)

The premium tax credits are advanceable. You can use all, some, or none of your premium tax credit in advance to lower your monthly premium. The Marketplace will actually pay the insurance company your premium tax credit (in advance) so that you only have to pay the difference. Let’s revisit our example from above. If you qualify for a premium tax credit of $1,000 per month and you pick a plan with a $1,250 monthly premium, you would only need to pay $250. The Marketplace would pay the insurance company the $1,000 premium tax credit on your behalf every month.

Premium tax credits get reconciled when you file taxes. Any premium tax credits you receive in advance are based on an estimated income. At tax time, the IRS reconciles your estimated income with your actual income and adjusts your premium tax credit. 

  • If you use more credits in advance than you qualify for, you’ll repay some or all of the difference when you file your federal income tax return.
  • If you use less credits in advance than you qualify for, you’ll receive the difference as a refund when you file your taxes.

To avoid surprises during tax time, it’s important to estimate your income as accurately as you can. And if your income changes mid-year, it’s a good idea to report those changes to the Marketplace so that your premium tax credit adjusts as well.

Note: We recently put together a guide to how the premium tax credit works.

Employers disqualify employees from premium tax credits

Unfortunately, many Americans with incomes that qualify them for premium tax credits are then disqualified because their employer offers them crappy coverage. Crappy employer-provided coverage is any coverage that meets one or more of the following criteria:

  • Requires employees to pay 50 to 100 percent of the monthly family health insurance premium via payroll deduction.
  • Has $20,000-plus annual out-of-pocket maximums.
  • Only offers bare-bone coverage so that the employer can avoid paying tax penalties (i.e.  “MEC Plans”).[2]

If more employers were aware of premium tax credits, fewer would offer group health insurance. Instead, they’d offer employees an allowance and let them buy their own coverage. (This is what Employer Partner Program enables.)

Educating Americans on premium tax credits

We’ve now saved many of our clients $10,000s per year by helping them understand and use premium tax credits. That is life-changing money for many households. 

In 2021, LegUp Health will ramp up its advocacy efforts. I expect our primary initiative will be to drive local awareness and understanding of these credits. If you’d like to participate in educational outreach in Utah, please reach out. We’d love your help.

Notes:

[1] The source for this data is CMS.gov.

[2] Minimum Essential Coverage (MEC) Plans are plans that only cover routine health services such as wellness benefits, preventive care and certain routine medical care. These plans do not provide traditional, major medical insurance coverage. They are designed specifically to disqualify employees from premium tax credits so that the employer can avoid tax penalties for not offering coverage.

Continue reading

Find, use, and manage your own health insurance with LegUp Health