Tuesday, January 21, 2014

Purchasing Health Care Thru the Exchange: Who Gets Government Aid?

The Premium Assistance Tax Credit (PATC) is designed to help “lower” income individuals and families pay for health insurance plans purchased through the new health care exchange program. However, more people may qualify for government assistance when purchasing health care through the exchange than may realize.

The program defines “lower” income as households that earn less than 400% of the Federal Poverty Level (FPL), which is based on the number of individuals in the home. In 2013, the FPL for a single individual was $11,490. Similarly, the FPL for a household of two people was $15,510 and the FPL for a home of four individuals was $23,550. Consequently, at least some premium assistance credit is available for individuals earning less than $45,960, couples earning less than $62,040, and a household of four earning less than $94,200. (Click here for more information on the Federal Poverty Level for households of various size.)

It’s important to note that for the purposes of the assistance program, income is defined as modified adjusted gross income. This means that a taxpayer’s adjusted gross income will include all Social Security benefits received (whether it was taxable or not), and all bond interest (tax-exempt or not). This factor will reduce a person’s eligibility for aid if he begins receiving Social Security before age 65 (at which point he qualifies for Medicare and can no longer participate in the health care exchange).

The amount of aid the government will provide is essentially calculated in reverse – the maximum amount that an individual or family can owe is calculated, and the government will pay the remaining premium. The table below shows the Premium Assistance Tax Credit thresholds based on income relative to the Federal Poverty Level:

Income Relative To FPL:
Premiums Limited To:
Up to 133% of FPL
2% of household income
133% to 150% of FPL
3% to 4% of income
150% to 200% of FPL
4% to 6.3% of income
200% to 250% of FPL
6.3% to 8.05% of income
250% to 300% of FPL
8.05% to 9.5% of income
300% to 400% of FPL
9.5% of income

For example, assume John is a single 62-year-old living in Utah and making $30,000 per year. (Again, remember that when calculating the PATC, it really doesn’t matter whether John’s $30,000 of income is from employment, a Social Security benefit, or a combination of the two.) John’s income is 261% of the FPL amount for singles [($30,000/$11,490) * 100], so this puts his threshold between 8.05% and 9.5% of his income. His exact threshold is 11/50ths of the way between 250% and 300% of the FPL, so his maximum premium is 11/50th of the way between 8.05% and 9.5%, which means his maximum premium is 8.37% of his $30,000 income, or $2,511 per year ($210 per month). This is the most John will need to pay for an adequate health insurance plan.

What is deemed an adequate health insurance plan? The next relevant figure in the calculation involves determining the cost of the second least expensive Silver plan in the state. This can be determined by obtaining a quote at www.healthcare.gov. Assuming John lives in Salt Lake County, the second least expensive Silver plan available to him cost $5,100 per year ($425 per month). Whether or not John decides to purchase this exact policy, the $5,100 annual cost of the plan is significant.

Since the second least expensive Silver plan available to John cost $5,100, but the most John will be required to pay is $2,511 per year (8.37% of his income), the PATC program will cover the cost difference of $2,589. This amount will be the tax credit available to John for purchasing any health insurance policy through the exchange.

However, this does not mean that John is required to actually purchase and utilize the second least expensive Silver plan available to him. If John is so inclined, he can purchase a less expensive policy and he will still receive the $2,589 tax credit determined to be available to him. However, since the policy is less expensive, John would need to cover less of the cost of the inferior policy out of his own pocket. Similarly, John could also purchase a more expensive policy, but his tax credit would still be $2,589 and he would need to cover the additional cost of the superior policy with his own money.

People are still familiarizing themselves with the options available within the health care exchange. Many will be surprised by their eligibility for assistance, and the amount of government aid available. Determining whether you qualify for a Premium Assistance Tax Credit will help you evaluate the attractiveness of the program.

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