The Premium Tax Credit is a financial benefit provided by the government to help eligible individuals and families afford health insurance coverage through the Health Insurance Marketplace. This credit is designed to lower the cost of monthly insurance premiums, making healthcare more accessible. The amount of the credit is determined based on household income, family size, and the cost of insurance in the individual's geographic area.
When properly understood, the Premium Tax Credit can be a powerful tool accessible to millions of Americans with proper planning. This credit has the potential to be especially valuable for individuals retiring before the age of 65.
In This Insight
What is the Premium Tax Credit?
What are the eligibility requirements for the Premium Tax Credit?
How to qualify for the Premium Tax Credit
How to maximize your Premium Tax Credit
What is the Health Insurance Marketplace and why does it matter?
Do you have to pay back the Premium Tax Credit?
What is the Premium Tax Credit?
The premium tax credit is a financial benefit offered to individuals and families who meet certain income requirements and purchase health insurance through their state's Health Insurance Marketplace. The credit is designed to lower the cost of health insurance by providing a government credit if certain requirements are met. It can be a powerful retirement planning opportunity for individuals that have reached their retirement years, but are not yet claiming their Medicare benefits. The total cost of medical insurance can often be lower utilizing this credit, than traditional health insurance options or COBRA.
The computation of the Premium Tax Credit is complex and depends on several factors including number of individuals in your household, your income relative to the poverty level, and geographic locate. A key note here, is that assets are not part of the calculation, meaning retirees in their pre-Medicare years, with a healthy nest egg, have the potential to participate with careful planning.
At a high level, for many retirees, the Premium Tax Credit may help mitigate health insurance costs if they exceed approximately 8.5% of your income. If your medical insurance does exceed 8.5% of your income, you may be eligible to receive a tax credit.
What is a Second Lowest Cost Silver Plan?
The second lowest cost silver plan" (SLCSP) is a term primarily associated with health insurance in the United States, particularly in the context of the Affordable Care Act (ACA) and the Health Insurance Marketplaces.
Health insurance plans available through the Marketplace are primarily divided into four "metal" categories based on how costs are shared between the insurer and the enrollee: Bronze, Silver, Gold, and Platinum. Silver plans typically cover about 70% of an enrollee's healthcare expenses, with the enrollee responsible for the remaining 30% through deductibles, copayments, and coinsurance.
The SLSCP is important in a person's region is crucial because it is the benchmark used to calculate the premium tax credit that help eligible people purchase coverage through the Marketplace. The tax credits are designed to help reduce the monthly premium amounts for eligible enrollees.
Where to find the SLCSP?
The SLCSP can vary by region and by year, as insurers might change their pricing structures, and some plans may enter or exit the market. To find the SLCSP for a specific region in a specific year, one would typically use the tools provided on the official Health Insurance Marketplace website or consult with a healthcare navigator or insurance broker familiar with the local market.
Basic Examples
All examples assume you meet the eligibility requirements. The examples are also simplified to ignore complexities of the sliding scale based on poverty line calculations. To perform the calculation properly, we recommend consulting a financial professional.
Example #1: You have $30,000 in reported income and the SLCSP is $1,000 per month. At this income level your estimated contribution percentage would be 2%, meaning you'd expect to pay $50 per month for the plan and receive a tax credit of $950 per month.
Example #2: You have $100,000 in reported income and the SLCSP is $1,000 per month. At this income level your estimate contribution percentage would be 8.5%, meaning you'd expect to pay $708 per month for the plan and receive a tax credit of $292 per month.
What are the eligibility requirements for the Premium Tax Credit?
There are some importance nuances to this government program that make it unique. In order to qualify for the Premium Tax Credit you must meet four criteria:
Individuals must be a U.S. citizen or lawfully present in the United States
Individuals cannot be eligible for other "minimum essential coverage" such as Medicare or Medicaid
Individuals must fall below the Adjusted Gross Income limit
Individuals must purchase coverage in the Health Insurance Marketplace for their state
It is import to note that this credit is based on income, not assets. This critical distinction creates the potential to benefit from this program by carefully managing your income in retirement, even if you have a high net worth.
How to qualify for the Premium Tax Credit
Based on the eligibility requirements, an individual must be a U.S. citizen or lawfully present in the United States, not eligible for other "minimum essential coverage", have income below the AGI limit, and purchase insurance on the Health Insurance Marketplace.
If you are before the age of 65, meaning you are not yet eligible for Medicare, and a U.S. citizen, you likely meet the requirements for #1 and #2. Purchasing coverage on the Health Insurance Marketplace can be done through an insurance broker or on the state exchange. Each state has a different exchange, but many can be found here.
After satisfying these three requirements, it all comes down to minimizing your AGI, which we discuss next.
How to maximize your Premium Tax Credit
Maximizing your Premium Tax Credit is all about managing your income. Even for retirees with a substantial net worth, it is often possible to minimize your AGI in your pre-Medicare years to gain the maximum benefit of the credit. Here are a few key strategies to minimize your AGI during pre-Medicare years:
Place interest earning assets in Qualified Retirement accounts (Traditional IRA, 401(k), etc.) to avoid taxable income.
Avoid realizing capital gains in taxable accounts.
Avoid withdraws from Pre-Tax IRA accounts, as these withdraws will increase your AGI.
Consider delaying Roth IRA conversions until after your start Medicare. It is possible that the benefit of the Premium Tax Credit is more valuable than the tax savings from Roth IRA conversions.
Consider delaying social security to minimize AGI. The goal of delaying is to minimize your taxable income, however, this requires a careful analysis, as a portion of your social security may not be taxable at low levels.
The goal of these strategies is to minimize AGI and maximize your credit. It may be possible to invest your assets in a well balance retirement portfolio while simultaneously minimizing reported income by placing the right assets in the right accounts and purchasing the proper securities. If done properly, there is the potential to receive upwards of $10,000 annually in tax credits per individual.
What is the Health Insurance Marketplace and why does it matter?
The Health Insurance Marketplace, also known as the Exchange, primarily exists to help people purchase and acquire health insurance. This service allows individuals, families, and small businesses to compare different health insurance plans to find the one that best fits their needs regarding cost and coverage. This process of evaluating and selecting a suitable plan enables them to make informed decisions while acquiring health insurance. The Marketplace is available online at: HealthCare.gov.
To qualify for the Premium Tax Credit, you must purchase a health insurance plan from the Health Insurance Market place for your state.
The Health Insurance Marketplace is a resource for individuals, families, and small businesses to compare and purchase needed health insurance plans. It is the gateway to qualify for the Premium Tax Credit.
Do you have to pay back the Premium Tax Credit?
The Premium Tax Credit is applied by directly by reducing your monthly expenses paid on the Healthcare Exchange. If your SCLSP cost $1,000 per month, you'd utilize the credit by paying an amount that is reduced by the tax credit amount. In effect, you're receiving the tax credit before filing your taxes, which means year end reconciliation is generally required.
If your income falls below the estimated amount, you may be eligible for additional credits at the end of the year. If you income exceeds the estimated amounts, you may be required to repay a portion or all of the tax credit you received.
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Final Thoughts
The Premium Tax Credit serves an essential role in reducing healthcare costs for individuals that meet the right conditions. There's great value in understanding how to qualify for and maximize this credit, as it can substantially reduce your medical costs in your Pre-Medicare years. It is important to note that high net worth individuals may still be eligible with careful management of income and the benefits of the credit may be well worth the effort.