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What You Should Know About Health Insurance Subsidies and Tax Credits

Content provided by: Better Medicine from Healthgrades

The Affordable Care Act (ACA) requires that everyone enroll in a health insurance plan. This is the individual mandate. People who don’t enroll will have to pay a financial penalty. But what if you don't make enough money to afford the premiums, deductibles or co-pays of a health plan?

The ACA, also popularly known as “Obamacare,” provides tax credits and cost-sharing subsidies to help people buy and use health insurance. The financial assistance in the ACA is available to people with low to moderate income. Consumers must buy health insurance through the health insurance exchanges, or marketplaces, in order to access tax credits or subsidies.

Premium Tax Credits

Insurance premiums are monthly, quarterly or yearly payments to insurance companies for providing insurance. Premium tax credits will help people reduce the amount of money they pay for insurance premiums. To qualify, a person must earn between 100% and 400% of the federal poverty level and buy coverage through a health insurance marketplace, also called an exchange. In 2013, that would mean an income between $11,490 and $45,960 for individuals or between $23,550 and $94,200 for a family of four.

People won't have to wait until they file their taxes to receive a tax credit. The tax credits go straight to the insurance company to lower the premiums by the amount of the tax credit.

You can apply for a tax credit when you enroll through an insurance marketplace. You will need to supply income and employment information to see if you qualify. The marketplace will estimate your tax credit based on the information you provide. The exact amount of your tax credit will depend on your federal income tax return for the year. If your estimate was less than your actual credit, you will receive the balance as a refund. However, if your estimate exceeded your actual credit, you must repay the amount as tax due.

Cost-Sharing Subsidies

Cost-sharing subsidies will reduce the amount of out-of-pocket expenses people must pay for medical care. Out-of-pocket costs include co-pays, deductibles, co-insurance, and other fees. People with incomes between 100% and 250% of the federal poverty level qualify. In 2013, that means an income would have to fall between $11,490 and $28,725 for individuals or between $23,550 and $58,875 for a family of four. The Kaiser Family Foundation has a subsidy calculator tool to help determine whether a person qualifies for a cost-sharing subsidy.

The Bottom Line on Tax Credits and Subsidies

Essentially, people can enroll in a health plan that covers a larger amount of costs and requires lower co-pays and deductibles. The tax credits allow people to buy a silver-level insurance plan who otherwise couldn’t afford that level. A silver plan covers 70% of healthcare costs, with the consumer paying 30%. The cost-sharing subsidies increase the percent the plan covers and reduce the percent the consumer pays to less than 30%.

People with cost-sharing subsidies will pay out-of-pocket amounts for medical services they receive based on their income.

  • People earning 100 -150% of the poverty level will have 94% of their medical costs covered and will pay 6% themselves.
  • People earning 150 - 200% of the poverty level will have 87% of their costs covered and will pay 13% themselves.
  • People earning 200 - 250% of the poverty level will have 73% of their costs covered, while they pay 27%.

Key Takeaways

  • Two types of financial assistance are available to people with low to moderate incomes who buy health insurance through a health insurance marketplace: tax credits and cost-sharing subsidies.
  • Tax credits will help defray part of the cost of your insurance premiums.
  • Cost-sharing subsidies will reduce the amount of out-of-pocket expenses you have to pay.

Sources

1. Explaining Health Care Reform: Questions About Health Insurance Subsidies. Kaiser Family Foundation. http://kaiserfamilyfoundation.files.wordpress.com/2013/01/7962-02.pdf Accessed Aug. 7, 2013.

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