Beginning January 1, 2014, the Affordable Care Act (ACA) requires most Americans to have some level of health insurance coverage. However, health insurance can be costly, so the law was designed with the idea that if you are going to mandate that everyone have it, then you should help people with lower incomes pay for it.
Under the new law the federal government will provide premium tax credits and cost sharing subsidies to help lower the cost of health insurance if you have a certain income and buy a plan on the new government-run Health Insurance Marketplace. So what is the difference between tax credits and subsidies? And how do you know if you qualify?
In a nutshell: Premium tax credits help pay for a portion of the monthly cost of your insurance premiums. Cost-sharing subsidies reduce your out-of-pocket expenses, including the amount you pay before your health plan begins to pay (known as a deductible), or the set amount you pay when you see a doctor or visit a hospital (known as copay).
The amount of the tax credit you receive will be determined by your income. It is a sliding scale based on a percentage of how much income you or your family make each year.
In Pennsylvania, premium tax credits will be available if your household income is between 100 and 400 percent of the federal poverty level. For example, in 2014, an individual will be eligible for tax credits if he or she makes less than $45,960 per year. In 2014, a family of four will be eligible for tax credits if they make less than $94,200. View the complete income chart.
When you purchase health insurance through the marketplace, you will estimate your 2014 income to determine if you are eligible for a tax credit. If you’re eligible, the tax credits will lower your monthly costs right away. Or you can defer a portion, or all, of the tax credit and apply it to your end-of-year income tax return. For example, if your tax credit for the year is $1,200 you can choose to apply $100 per month to help pay for your health insurance premiums or you can apply $1,200 towards a refund on your income tax return.
It’s important to know that you can only qualify for a premium tax credit if you purchase a health insurance plan on the marketplace.
Like tax credits, cost-sharing subsidies are designed to help people pay for medical care and are based on a percentage of household income. They help reduce the cost of your copay when you see your doctor or visit a hospital, or the amount you pay for services after your insurance has paid.
Cost-sharing subsidies will be available for individuals with incomes between 100 and 250 percent of the federal poverty level. For example, in 2014, an individual will be eligible for a cost-sharing subsidy if he or she makes less than $28,725 per year. In 2014, a family of four will be eligible for a cost-sharing subsidy if they make less than $58,875. View the complete income chart.
To be eligible for a cost-sharing subsidy you must enroll in a silver plan. Subsidies are paid directly to the insurer.
Are you eligible for tax credits or cost-sharing subsidies?
As you’re shopping for a plan, both Independence Blue Cross and the government-run Health Insurance Marketplace will display what your premiums will be after the tax credit is applied, making it easy to know what you have to pay each month. To see what you may have to pay, visit our new calculator at www.ibx4you.com.
A few extra notes on tax credits
One important thing to remember: if your household income in 2014 is different than what you estimated, you will be responsible to pay the difference or will receive a refund on your tax return.
Tax credits and subsidies are only available to those who are not eligible for a government-sponsored program like Medicare or Medicaid, or those who don’t have access to an affordable** employer-sponsored program.
**An employer plan is considered affordable if it covers at least 60 percent of required benefits, or if the employee’s share of the premium does not exceed 9.5 percent of the employee’s income.