Effective January 1, 2014, the Patient Protection and Affordable Care Act (PPACA) will require most individuals to maintain minimum essential health coverage for themselves and their dependents or face penalties. Because the cost for good, quality coverage is expensive, it’s often out of reach for many lower and moderate income families. In an effort to make health insurance more obtainable to families that couldn’t otherwise afford it, PPACA provides two options to individuals with household incomes between 100% and 400% of the Federal Poverty Level:
- Expanded Medicaid coverage
- Insurance tax credits
Under Federal urging, many states have expanded Medicaid eligibility rules, making it easier for more people to qualify for this program. Other states have chosen to retain Medicaid at its current level while still others have yet to make a decision. The status of state Medicaid coverage can be found here.
To be eligible for an insurance tax subsidy, an individual must match all of the following criteria:
- Individuals who purchase coverage through their state exchange; and
- Citizens and legal residents with family incomes between 100% to 400% of poverty; and
- Individuals not eligible for public coverage; and
- Individual does not have access to affordable coverage with at least a 60% actuarial value through their employer.
How much tax credit will people receive in the exchange?
To be eligible for a subsidy in the exchange, an individual must at least be enrolled in the second-to-lowest cost Silver level plan. The amount of the subsidy will be dependent on the employee’s household income.
| Income Level | Premium as a Percent of Income |
|---|---|
| Up to 133% FPL | 2% of Income |
| 133 – 150% FPL | 3 – 4% of Income |
| 150 – 200% FPL | 4 – 6.3% of Income |
| 200 – 250% FPL | 6.3 – 8.05% of Income |
| 250 – 300% FPL | 8.05 – 9.5% of Income |
| 300 – 400% FPL | 9.5% of Income |
Kaiser Family Foundation “Focus on Health Reform” July 2012
How will individuals receive tax credits?
Tax credits will be both refundable and advanceable. An advanceable credit allows an individual to receive assistance immediately upon purchasing insurance rather than paying the full cost out of pocket and deducting from their tax return. In other words, if the premium is $600 and the individual has an advanceable credit of $200, they would pay only $400. On the other hand, a refundable credit means the individual would pay the entire $600 up front and receive the $200 subsidy upon filing their taxes in the following year.
What other subsidies will be available to qualified individuals?
If an individual qualifies for a premium tax credit, they may also qualify for two other subsidies: reduced cost sharing and reduced out of pocket maximums. To assist people afford plans with lower actuarial values, a provision is in place to reduce their cost sharing responsibility.
| Income Level | Actuarial Value |
|---|---|
| 100 – 150% FPL | 94% |
| 150 – 200% FPL | 87% |
| 200 – 250% FPL | 73% |
Kaiser Family Foundation “Focus on Health Reform” July 2012
PPACA also limits the amount of out-of-pocket expenses a plan can place on an individual. People with incomes at or below 400% of the Federal Poverty Level will have their out-of-pocket liabilities capped at lower levels.
| Income Level | Reduction in Out-of-Pocket Liability |
|---|---|
| 100 – 200% FPL | Two-thirds of the maximum |
| 200 – 300% FPL | One-half of the maximum |
| 300 – 400% FPL | One-third of the maximum |
Kaiser Family Foundation “Focus on Health Reform” July 2012
Subsidies are not a simple, straight-forward calculation. As you can ascertain from the information above, there are multiple criteria to be met in order for an employee to have a subsidy. The important takeaway for employers is to understand how this system works, and communicate with employees so they do not make the bad assumption that they can get cheaper medical coverage through an exchange due to the subsidy. The employers who have employees getting coverage through an exchange are apt to incur penalties, so it is worth your while to provide communication on the parameters of the State and Federal Exchanges. It will save headaches and paperwork later on!