Health Insurance Premium Assistance Credit

Beginning in 2014, a penalty will be imposed on certain individuals who fail to have minimum essential health insurance for themselves and their dependents. However, to help subsidize the cost of health insurance and make it more affordable, eligible individuals who purchase coverage under a qualified health plan through an Affordable Insurance Exchange may receive a premium assistance credit. The IRS has issued guidance for employees on their eligibility to claim this credit.

In order to be eligible for the premium assistance credit, a taxpayer must satisfy the following criteria:

• The taxpayer's household income must be at least 100 percent, but not more than 400 percent, of the federal poverty line (FPL) for a family of the size involved. As an example, based on the 2013 FPL, a family of four must have household income between $23,550 and $94,200.
• Taxpayers who are married at the end of the tax year must file a joint return.
• The taxpayer must be a qualified individual, which means an individual seeking to enroll in a qualified health plan in the individual market offered through an Exchange, and residing in the State that established the Exchange.
• In addition, an individual who can be claimed as another taxpayer's dependent is not eligible for the premium assistance credit.

The premium assistance credit operates on a sliding scale that begins at two percent of income for taxpayers at 100 percent of the FPL and phases out at 9.5 percent of income for those at 300-400 percent of the FPL. For instance, if the credit were in effect for 2010, the premium for the second lowest cost silver health plan for family coverage would be $11,500, and if a family of four had household income of $88,000 (approximately 400 percent of the current FPL), the credit would be $3,140 ($11,500 - $8,360 ($88,000 x .095)) since the taxpayer would be expected to pay 9.5 percent of income, or $8,360, for health insurance premiums. In contrast, if the family's household income was $29,000 (approximately 133 percent of the current FPL), the credit would be $10,920 ($11,500 - $580 ($29,000 x .02)) because the taxpayer would be expected to pay only two percent of income, or $580, for health insurance premiums.

The premium assistance credit amount for any tax year is the sum of the premium assistance amounts for all of the coverage months during the tax year. The term coverage month does not include any month that the individual is eligible for minimum essential coverage outside the individual market, e.g. provided under an employer-sponsored plan. However, an employee is not considered eligible for minimum essential coverage under an employer-sponsored plan, if the employee’s required contribution for the employer-sponsored would exceed 9.5 percent of the employee’s household income. This rule also applies to family members of an employee who would be eligible to enroll in an employer-sponsored plan. In addition, an employer-sponsored plan that provides less than 60 percent coverage for total allowed costs does not provide minimum essential coverage because it does not provide minimum value.

In addition to an individual’s requirement to have minimum essential health coverage for themselves and their families, large employers are required to share the responsibility for coverage or pay penalties. Each state must also