Obama administration outlines federal tax credit for health insurance buyers

John Egan

The Obama administration on Aug. 12, 2011, proposed an average federal tax credit of more than $5,000 a year buyers of private health insurance through new one-stop insurance marketplaces being created under the federal health care reform law.

Generally, the tax credit will be available to individuals and families with income between 100 percent and 400 percent of the federal poverty level ($22,350 to $89,400 for a family of four in 2011). The Congressional Budget Office estimates that when health care reform is phased in, the tax credit will help 20 million Americans afford health insurance.

“The amount of the premium tax credit is tied to the amount of the premium, so that older Americans who face higher premiums will receive a greater credit,” the U.S. Treasury Department says.

To be eligible for the tax credit, someone must be enrolled in a “qualified” health insurance plan through one of the insurance marketplaces — known formally as “exchanges.” Furthermore, anyone covered through an insurance marketplace can’t be eligible for Medicare, Medicaid or an “affordable” employer-sponsored health plan.

The exchanges are being designed to allow working Americans without job-based coverage to shop for affordable health insurance. The insurance marketplaces are set to start operating in 2014.

For moderate-income families who don’t have enough cash to pay a full health insurance premium upfront, an advance payment of the tax credit will be made by the Treasury Department to the health insurance company. Later, the advance payment will be reconciled against the amount of the family’s actual tax credit, as calculated on the family’s federal income tax return.

Federal officials offer these scenarios to explain how the tax credit will work:

• A family of four with annual income of $50,000 enrolls in what’s called a “benchmark” health insurance plan. The annual premium is $9,000. With a tax credit of $5,430, the family’s actual expense is $3,570 a year.

• A family of four with annual income of $50,000 buys health insurance that costs less than the “benchmark” plan. The annual premium is $7,500. With a tax credit of $5,430 (based on the $9,000 annual cost of the “benchmark” coverage), the family’s actual expense is $2,070 a year.

The tax credit will be capped at the premium chosen by the family so that no one gets a credit that’s larger than the amount actually paid for the coverage, federal officials say.