The premium tax credit which allows individuals and families to pay for insurance obtained through a Health Insurance Marketplace or Exchange is something most employers have become more familiar with since it was created by a provision of the Affordable Care Act (ACA). What many employers may still not completely understand is how health credits work.
This thought is one shared by many employers who struggle with navigating the ever-changing landscape of insurance options and what it can mean for the business and its employees. A certified public accountant can be invaluable in helping clients traverse these murky waters by educating them about health credits, specifically the premium tax credit, and potential penalty exposure.
What Is A Premium Tax Credit?
A premium tax credit, often referred to by the acronym PTC, may help people earning a low to moderate income still afford health insurance through the Health Insurance Marketplace or Exchange. Not every premium tax credit is the same as they are based on a sliding cost.
Individuals who enroll in Marketplace insurance can do one of two things:
- Have the Marketplace estimate the credit which is then paid to an insurance company to potentially lower monthly premiums (this can require some reconciliation of the amount paid in advance with the credit computed for a tax return)
- Receive benefits of the premium tax credit at the time of filing their tax return
Eligibility for Health Credits
There are criteria an individual must meet in order to be eligible to receive the premium tax credit, including:
- Having a household income between roughly one hundred and four hundred percent of the federal poverty line for the size of their family (these numbers can vary depending on the year)
- Not being claimed as a dependent by another person
- Not filing a Married Filing Separately tax return (although some exceptions are allowed)
- Having yourself or a family member do the following in the same month: enroll in Marketplace coverage, cannot receive affordable coverage through a specified employer plan, cannot get coverage through special government programs, pay the share of premiums not covered by advance credit payments
How A Premium Tax Credit Is Computed
As mentioned above, a premium tax credit is determined using a sliding scale. This means that an individual with a lower income could get a bigger credit to assist with covering the cost of insurance, and an individual with a higher income may receive a smaller credit.
On average, the premium tax credit is about the same as the premium for the second lowest cost silver plan in the Marketplace that is applicable to the members of an individual’s coverage family minus a percentage of the individual’s income. However, please note that a credit is not allowed to be more than the premium for Marketplace plans the individual or family is enrolled in.
A Word About Potential Penalty Exposure for Tax Payers
Although premium tax credits are designed to help individuals and families get coverage through a Health Insurance Marketplace or Exchange, it could potentially create headaches for some people. This is due in large part to the way people are asked to estimate their income. The Marketplace asks you to guess on your income for next year. Most people will quickly realize that the lower the number they put in, the bigger the credit. When tax time rolls around, you get penalized for under estimating. Additionally, the penalty you receive is often less than the total amount of healthcare insurance you would have paid had you been honest with your income. Ever heard of no good deed goes unpunished? Since healthcare costs are a deduction against income, you would need to sit down and calculate your cost of insurance at various levels of income. You are effectively balancing a low payment plus a penalty against a full payment. The crazy part is that the equation never balances. Basically, if you are self employed and have a family, you may want to pay the penalty at year-end since it would be cheaper than paying the full amount of insurance each month. If you make above $100,000 in annual income, there is usually no option for a credit anyway.
How A CPA Can Help Business Owners Navigate Health Options
If you own a business and are considering offering insurance to your employees (or buying it yourself), many businesses are starting to experiment with Health Reimbursement Arrangements. These payments are not insurance. They are non-taxable payments to employees to help offset the cost of them purchasing their own healthcare. For those who buy insurance directly from a private insurance, none of this applies to you. For those who buy from the Marketplace, figuring out your Premium Tax Credit vs your Penalty vs full healthcare cost could actually save you major money in the long run.
What to Look for in A Certified Public Accountant
Especially when dealing with matters such as health and premium tax credits, it is important to have a certified public accountant who goes above and beyond the services most CPAs provide. The ultimate goal in partnering with a certified public accountant is to have them help you work the numbers so you can focus on the work at hand.
Several things to keep in mind when looking for a CPA to partner with include:
- A degree in accounting paired with other related fields
- An up-to-date certified public accountant license for the state they are practicing in
- Past experience in a variety of different work settings including accounting companies and financial institutions
- Professional affiliations with industry organizations such as the American Institute of Certified Public Accountants (AICPA) and the Texas Society of Certified Public Accountants (TXCPA)
- The provision of multiple accounting services such as audits, taxes, advisory and consulting
- A reputation of success and respect among clients as well as industry peers
If your company is feeling overwhelmed or confused about how health credits work, reach out today to find out more information and learn how a certified public accountant can help.