Since the passage of the Affordable Care Act, there have been mixed reviews on just how “Affordable” health insurance premiums are. The reality here is that the term “Affordable” has an actual, real-world, technical definition that is objective, not opinion.
Upon the finding of the ACA, congress recognized that the majority of people were enrolled in employer coverage, Medicaid (for low-income households), and Medicare (for seniors). The ACA was rolled out to set standards for what must be covered by an employer, AND to create a market for individuals to access coverage that also does not discriminate based upon their health history.
To make a plan affordable, congress introduced a premium tax credit for individuals to level the playing field to what employers offered.
What is the premium tax credit?
The premium tax credit is a per month reduction of health insurance premiums provided by the Affordable Care Act to eligible individuals and families.
When you enroll in individual health coverage through the Exchange designated in your state, the Exchange uses three variables to determine the amount of credit someone is eligible for:
- The demographics of everyone you list on your tax return (whether seeking coverage or not)
- The total household income you expect for the year you need coverage (minus a shortlist of deductions)
- A benchmark plan, roughly the average plan, that is available in your county.
If the premium to cover your family members seeking coverage is more than what is LEGALLY affordable, a tax credit is awarded to bring that benchmark premium down to affordable.
The Exchange serves the purpose of calculating your estimated credit and telling the insurance company you select to only bill you the net premium and to bill the Exchange the tax credit amount.
What household information is needed?
Generally speaking, when looking at whether you have access to affordable options, they have to compare the benchmark plan available in your county against your household income and household size. Effectively, the larger your family is, regardless of who is enrolling, the more help you will get to drive down your costs.
We use this chart, https://aspe.hhs.gov/poverty-guidelines, to look at your household size and multiply the number next to your household size by 4 to see how they define affordable. For instance, if I have a single person who makes $50,000 per year, they need less help than a family of 6 making $50,000 per year. Again, to determine affordability we consider the whole family size and whole family income regardless of who is actually covered.
What income information is needed?
With income, the question is whether you will look at Medicaid, or not.
Medicaid: This program varies GREATLY from state to state, so it is good to talk with someone who understands the region you are in, and your specific circumstances. That being said, in general, the Medicaid system was designed to be reactive in nature. Often, people who become eligible for the support of Medicaid are temporarily displaced due to a life circumstance that has the family seeking the maximum amount of help until their situation changes. Because of this, for Medicaid, many states look at your most recent month of income and make adjustments as needed. For instance, if someone is let go at the end of a month, Medicaid would consider the 1st of the month following the termination to be when Medicaid would start. These programs are helpful since in many cases there is very little to no premium or copays when someone seeks care.
Not Medicaid: When your income exceeds the limit for Medicaid, the ACA generally looks at your income for the entire year you need coverage. You would want to add together w-2 wages, Social Security, Pensions, Retirement Plan Income, Business Profits, and Real Estate Income. There is a long list that healthcare.gov has gathered here: https://www.healthcare.gov/income-and-household-information/how-to-report/
Note to Solopreneurs and Startups: Often in the first few years of business, every dollar that you plow back into growing your business is an expense on your profit and loss (P&L) report. It is pretty common that startups actually showing a loss can get Medicaid due to lack of income on paper.
Example of Household Size and Income
Peg is a 62-year-old who makes $50,000 per year. Based upon a household of one, the ACA considers the benchmark plan affordable if it is less than 8% of her income. 8% of 50,000 is $4,000 or roughly $330 per month. Due to her age, the average plan price in her county is $1,000. The Exchange would consider that unaffordable, and extend a tax credit of $670 per month to bring her premiums down.
Out of the 95 plans available in her county, she finds a $4,000 deductible plan for $700 per month. She is moreso trying to protect herself from a catastrophic event causing her retirement accounts to be spent on healthcare costs. So, the deductible was okay for her. Additionally, since she was eligible for a $670 reduction due to the Tax Credit, she would be left paying $30 per month to the insurance company.
Conclusion
As you can see, there is immense power in finding affordable options with the affordable care act. The starting place though is ACCURATELY determining your household income and household size. This is because, at the end of the year, when the IRS verifies this credit, the numbers you start with will tell them if you received too little or too much credit. At which time you will receive a refund, or pay back any miscalculated credits. If any of this sounds overwhelming, don’t hesitate to reach out to a broker in your area, or us.